CVP analysis

Question 1

CVP

Answer 1

Cost-volume-profit analysis helps managers understand the interrelationship between cost, volume and profit

Sales = Variable expenses + Fixed expenses + Profit

Question 2

CM%

Answer 2

The CM ratio shows how the contribution margin will be affected by a change in total sales. The greater the CM of a product is, the greater amount is the company willing to spend to increase the unit sales of the product by a given percentage.

Question 3

B/E units and DKK

Answer 3

The break-even point is when the level of sales reaches the point where profit is zero.

B/E unit sold = Fixed expenses / CM

B/E total sales = Fixed expenses /CM%

Question 4

MS % and DKK

Answer 4

The margin of safety is the excess of budgeted (or actual) sales over the break-even volume of sales.

MS = Total budgeted (or actual) sales - B/E sales

MS% = MS in DKK / Total budgeted (or actual) sales

Question 5

Assumptions

Answer 5

While some of these assumptions may be technically violated, they are usually not serious enough to call into question the basic validity.

1. Selling price is constant throughout the entire relevant range.
2. Costs are linear throughout the entire relevant range and can be divided into variable and fixed costs.
3. In manufacturing companies, stocks do not change (units produced = units sold).
4. In multi-product companies, the sales mix is constant (important assumption).

Question 6

Difference between payback and B/E units

Answer 6

The payback period is measured in time it takes to pay the investment back. Where B/E point is the volume of sales needed to reach 0

The break-even point focuses on the revenues needed to equal exactly all of the expenses on a single income statement prepared under the accrual method of accounting.

The payback period focuses on the pertinent cash flows of multiple accounting years instead of the net income of a single accounting period.

Question 7

Depreciation

Answer 7

Depreciation = (Fixed cost - salvage value) / Lifetime