CVP Analysis

Question 1

What are relevant costs?

Answer 1

Avoidable costs

Only occur as a result of making a decision

Question 2

What are non-relevant costs?

Answer 2

Unavoidable costs

Occur regardless of decision made

Question 3

Calculate Contribution Per Unit?

Answer 3

Contribution = Sales Revenue - All Variable Costs

Question 4

Calculate Break Even Point?

Answer 4

BEP in Units = Fixed Costs /

Contribution per Unit

Question 5

Calculate Margin of Safety?

Answer 5

MOS In Units =

Budgeted Sales in Units - Breakeven Sales in Units

Question 6

Calculate % Margin of Safety?

Answer 6

%MOS =

Margin of Safety in Units / x100
Budgeted Sales in Units

Question 7

Calculate % Margin of Safety?

Answer 7

%MOS =

Margin of Safety in Units / x100
Budgeted Sales in Units

Question 8

Calculate Units of Output needed to achieve Target Profit?

Answer 8

Output Units Required = Fixed Cost + Target Profit /

Contribution per Unit

Question 9

Calculate Contribution per Unit needed to achieve Target Profit?

Answer 9

Cont. Per Unit Required = Fixed Cost + Target Profit /
Budgeted Sales Units

*Increase in Contribution means a rise in selling price of the same amount

Question 10

Calculate P/V Ratio (C/S Ratio) ?

Answer 10

Total Contribution/ OR Contribution Per Unit/
Total Revenue Selling Price Per Unit

Question 11

Calculate Break Even Point In Sales?

Answer 11

Fixed Costs/
P/V Ratio

(*P/V Ratio = Contribution Per Unit / Selling Price Per Unit)

Question 12

Calculate the Sales Value that will return Target Profit?

Answer 12

Fixed Costs + Target Profit /
P/V Ratio

(*P/V Ratio = Contribution Per Unit / Selling Price Per Unit)

Question 13

Steps in Limiting Factor Analysis?

Answer 13

1. Identify Scarce Resource.
2. Calculate contribution per unit.
3. Divide contribution per unit by number of scarce resources needed to produce 1 unit.
4. Rank products from high to low contribution per limiting factor.
5. Allocate scarce resource to product 1, any remaining to product 2 and so on.
6. Calculate total contribution and total profit from new production plan.

Question 14

What is the payback period?

Answer 14

Length of time the initial cost of investment takes to be recovered from the Net Cash Flows.

*Use cumulative cash flow position

Question 15

Calculate Payback Period?

Answer 15

Take what you need and divide it by where it is coming from. Then multiply by 12

Question 16

What is the discounting factor?

Answer 16

The time value of money - money is worth more today than it will be tomorrow

AKA Cost of Capital ; Required return ; Discount Rate

Question 17

Calculate the Present Value?

Answer 17

Future Cash Flow x Discount Factor = Present Value

Question 18

What is Net Present Value?

Answer 18

Net Benefit or Loss of Benefit in present value terms of an investment

Question 19

Calculate Net Present Value?

Answer 19

1. Create future incremental cash flow ( cumulative cash flow)
2. Discount Net Cash Flow to Present Value using Discount Rates
3. Add Present Values to Initial Investment Outflow = NPV

Question 20

What is the Internal Rate of Return (IRR) ?

Answer 20

Calculates the rate of return or discount rate a project is expected to achieve if it breaks even.

IRR is the point where the NPV of an investment breaks even.

Question 21

Calculate IRR (Internal Rate of Return) ?

Answer 21

Calculate 2 NPV’s for an investment using different interest rates and compare to find the IRR…

% IRR = L + NL / x (H-L)
NL - NH

Where : L = Lowest Interest Rate
H = Highest Interest Rate
NL= NPV of the Lowest Rate
NH= NPV of the highest Rate