Cost Volume Profit (CVP) Analysis

Question 1

What does it mean if cost is classified according to behaviour

Answer 1

Fixed or variable

ho does the cost behave in relation to changes in the volume of activity

Question 2

Break even point formula

Answer 2

Fixed cost/ (Sales revenue per unit - Varible cost per unit)

Question 3

Contribution formula

Answer 3

Sales revenue per unit - variable costs per unit

Question 4

What does contribution per unit mean

Answer 4

It is the contribution of meeting the fixed costs - if there is an excess then there is a contribution profit

Question 5

Contribution margin ratio formula and what is means

Answer 5

Contribution margin ratio provides a good picture as to how much revenue is used to pay for fixed costs

Contibution/Sales revenue * 100%

Question 6

Margin of safety formula and what it means

Answer 6

Margin of safety is the extent to which the planned volume of output or sales lies above the BEP

Expected volume of sales - Break even point

Question 7

What is operating gearing

Answer 7

Relationship between fixed cost and variable cost is known as operating/operational gearing

An activity with a high fixed cost compared with its total variable cost = high operating gearing

• a movement in one of the factors (volume of output) causes a more than proportionate movement in the other (profit)
• increasing the level of operating gearing makes profit more sensitive to changes in the volume of activity

Question 8

what are some weaknesses of break even analysis

Answer 8

non linear relaationships (assumes total variable cost and total revenue lines are perfectly straight when plotted against volume of output)

stepped fixed costs (most type of fixed costs are not fixed over the whole range of activity)

multi product businesses (problem for break even analysis, since additional sales of one product may affect sales of the other product. Problem with identifying the fixed cost associated with a particular product)

Question 9

Reasons for non linear relationships

Answer 9

Economies of scale with labour (business may operate more economically at a higher volume of activity)

Economies of scale with buying goods or services (maybe cheaper to buy in bulk = quantity discount)

Lower sales prices at higher levels of activity (some consumers would only buy at lower price, making it hard to achieve high levels of sales volume without lowering the price

Question 10

What is marginal analysis

Answer 10

Pricing/assessing opportunties to enter contracts

Make or buy decisions

Determining the most efficient use of scarce resources

Closing or continuation decisions