CVP analysis

Question 1

What is CVP analysis?

Answer 1

It looks at the impact of varying levels of cost and volume on operating profit.

Question 2

What is the contribution margin ratio also known as?

Answer 2

Contribution sales ratio or profit volume ratio.

Question 3

What is another formula for profit using CM ratio?

Answer 3

Profit = (sales revenue X CM ratio) - Fixed cost

Question 4

The assumption for CVP analysis?

Answer 4

It can only be used for decisions that result in outcomes within the relevant range. Outside this range, we cannot assume that the selling price and VC are constant.

Question 5

Difference between contribution graph and break-even graph?

Answer 5

The contribution graph has the VC line and no FC line.

Question 6

What does the profit-volume graph look like?

Answer 6

One sales revenue curve going from negative to positive showing profit and loss at different units of production and sales.

Question 7

What are the advantages of CVP analysis?

Answer 7

1) Aids in decision making
2) Cost control- looking at patterns and locating inefficiencies.
3) Achievement of desired profit by identifying operating levels.
4) Aids in the prediction of future activity.

Question 8

What are the disadvantages of CVP analysis?

Answer 8

1) Does not consider all cost types e.g. stepped.
2) Focus on short term/ relevant range.
3) Limited applicability as it is most effective for businesses with simple cost structures and single product lines.