CVP Analysis, Limiting Factors and Budgeting

Question 1

Break Even Analysis

• In Marginal costing costs are classified as either ________ or ____________.
• Companies need to know how many units need to be sold to cover all the fixed costs

What is the formula for contribution?

What is the formula for profit?

Answer 1

• In Marginal costing costs are classified as either fixed or variable.
• Companies need to know how many units need to be sold to cover all the fixed costs

Contribution per unit (CPU) = Selling price – variable cost

Profit = Contribution per unit x number of units sold) – Fixed costs

Question 2

Break even analysis or CVP Analysis

What does CVP stand for?

What is BEP? (2)
What is the formula for BEP?

Answer 2

C = cost of the unit
V = volume of the unit
P = profit made

Breakeven Point (BEP) is the point at which neither a profit nor a loss is made
BEP is the number of units that need to be sold to cover the fixed costs
- BEP = Fixed costs / contribution per unit

Question 3

Margin of safety

This is…?
It can be expressed as:

Answer 3

This is the amount by which the sales exceed the BEP.

It can be expressed as:

• Number of units
• Sales revenue amount
• Percentage: current output – break even output/current output x 100 = % margin of safety

Question 4

Contribution sales ratio

What is it?
How is it calculated?
What can we use it for?

What is the formula for Break even sales revenue

Answer 4

Contribution expressed as a % of the selling price.

Contribution sales ratio % = Contribution / Selling price

We can use the CS ratio to find the sales revenue at which the company breaks even, or the sales revenue to give a target profit

Break even sales revenue = Fixed cost / CS ratio

Question 5

Target profit

What is it for?
What is the formula?

Answer 5

Some companies will want (need) to make a certain amount of profit, so this can be inbuilt into the
breakeven analysis to ensure that the right amount of units are produced.

Fixed costs + target profit / CPU = number of units

Question 6

When is break even analysis used? (5)

Answer 6

• Before starting a new business
• When making changes
• To measure profits and losses
• To answer ‘what if’ questions
• To evaluate alternatives

Question 7

Limitations of break-even analysis

Answer 7

• Assumes all output is sold
• All costs and revenues can be represented by a straight line
• Fixed costs remain fixed – and not stepped
  -There is a direct relationship between revenue and cost- in some case the more that is produced the cheaper it is per unit
• Only applies to the relevant range

Question 8

Limiting factors

What are limiting factors?
Examples (5)
When they are none, what should the business focus on?
What if there are?

Answer 8

Limiting factors are those aspects of a business which affect output.

• Lack of availability of materials
• Lack of availability of labour (especially skilled)
• Lack of availability of capital resources (machinery)
• Finance
• Volume of units that can be sold

Where there are no limiting factors, company should concentrate on the product
making the highest CS ratio

However, when there are limiting factors, production should be based on the highest
contribution from each unit of the limiting factor