CVP Analysis (Session 3)

Question 1

CVP Analysis

Answer 1

technique that examines changes in profits
in response to changes in sales volumes, costs, and prices.

Question 2

Contribution Margin

Answer 2

The contribution margin is the total revenue minus the total variable costs.

Question 2

Use CVP analysis to provide information about the following:

Answer 2

o Which products or services to emphasize.
o The volume of sales needed to achieve a targeted
level of profit.
o The amount of revenue required to avoid losses.
o Whether to increase fixed costs.
o How much to budget for discretionary expenditures.
o Whether fixed costs expose the organization to an
unacceptable level of risk

Question 3

Contribution Margin per Unit (CMu)

Answer 3

The contribution margin per unit (CMu) is the selling price per unit minus
the variable cost per unit.

Question 4

Break-even point

Answer 4

QTY SOLD = FC / CM

Question 5

Cost-Volume-Profit Graph

Answer 5

A cost-volume-profit graph shows the relationship between total revenues and total costs

Question 6

CVP Analysis for Multiple Products

Answer 6

When a company sells more than one product, the CVP
calculations must be adjusted for the sales mix.

Question 7

The sales mix is…

Answer 7

the proportion of different products or services
that an organization sells

WE ASSUME A CONSTANT SALES MIX

Question 8

How does sales mix analysis helps managers?

Answer 8

Sales mix analysis allows managers to achieve the combination of
sales that will yield the greatest amount of earnings.

Question 9

Uncertainties & Assumptions

Answer 9

• All organizations are subject to uncertainties

Question 10

Consider uncertainties about …

Answer 10

• Consider uncertainties about:
  o Revenue and cost estimates
  o Interpreting results
  o Relevant range of operations
  o Feasibility of activity level

Question 11

CVP analysis assumes that …

Answer 11

CVP analysis assumes that costs and revenues are linear within a relevant range of
activity

Question 12

Linear total revenue

Answer 12

selling prices/unit are constant, the sales mix does not change

Question 13

Linear total costs

Answer 13

total fixed costs are constant and variable costs/unit are constant

Question 14

Linear CVP analysis may be inappropriate if…

Answer 14

• Linear CVP analysis may be inappropriate if the linearity assumptions
  hold only over small ranges of activity
  o Nonlinear analysis techniques are available (e.g., regression analysis)

Question 15

Margin of Safety

Answer 15

• The margin of safety is the excess of an organization’s expected future
  sales (in either revenue or units) above the Breakeven Point

Question 16

Degree of Operating Leverage

Answer 16

The degree of operating leverage is the extent to which the cost
function is made up of fixed costs

Question 17

A high degree of operating leverage indicates…

Answer 17

A high degree of operating leverage indicates a high proportion of
fixed costs

Question 18

Businesses operating at a higher degree of operating leverage…

Answer 18

o Face higher risk of loss when sales decrease
o But enjoy profits that rise more quickly when sales increase

Question 19

The degree of operating leverage shows the sensitivity of …

Answer 19

The degree of operating leverage shows the sensitivity of profits to changes in sales

Question 20

Service companies can…

Answer 20

calculate CM, not gross margin