CVP

Question 1

What is the Break-even point

Answer 1

the point of sales where total sales is just enough to cover the total costs.

It is a position where the firm will not make any profit or suffer any loss.

TOTAL SALES = TOTAL COSTS

Question 2

CONTRIBUTION CONCEPT

Answer 2

A contribution is the amount of revenue available after the deduction of variable costs from sales.

SALES - VARIABLE COST = REVENUE(CONTRIBUTION)

It also is used to cover fixed costs and provide profits.

so,
SALES - VC = CONTRIBUTION - FIXED COST
Contribution – TFC = NP ( WILL GET REAL NET PROFIT)

Contribution is a fund, If there is any excess, it will
contribute to profits.

More contribution means more profit

Question 3

FORMULA FOR NET PROFIT IN CONTRIBUTION

Answer 3

RM
Sales      
Less: Variable costs 
CONTRIBUTION 
Less: Fixed costs
Profit

Question 4

ABOUT C/S RATIO IN THE CONTRIBUTION TECHNIQUE

Answer 4

The higher the ratio, the bigger will be the portion of contribution out of sales, hence the more the profits (FC is constant).

Question 5

Primary purposes of C/S RATIO

Answer 5

to compute contribution at any level of sales

to determine the profitability of the product line for decision making

i.e. C/S ratio is 50% indicates that for every RM1 of sales, the contribution is 50 cents.

Question 6

MARGIN OF SAFETY (MOS)

Answer 6

If MOS is broad, this means that the firm is in a strong position

So, when sales reduce, the firm will still be able to make some profit.

HOWEVER,

If the MOS is narrow, this means that the firm is not in a strong position because

if sales reduce, the profits of the firm may reach a break-even point or even make a loss if there is a further reduction in sales.

Question 7

What will happen if The higher the break-even point (BEP) to the MOS

Answer 7

The higher the break-even point (BEP), the narrower the margin of safety (MOS) become

and the firm’s position is not going to be strong enough