Definitions & Key Terms

Question 1

Relevant Range -

Answer 1

Period of time our analysis can be used

Question 2

Contribution

Answer 2

Difference between the sales price and the variable cost

Question 3

Unit contribution

Answer 3

Selling Price - unit variable costs

Question 4

Total contribution

Answer 4

Total Revenue - Total variable costs

Question 5

Total profit

Answer 5

Total contribution - fixed costs

Question 6

Profit

Answer 6

contribution per unit x number of units - Fixed Costs

Question 7

Cost Volume Profit (CVP) + Formula

Answer 7

• Uses contribution to determine how many of a unit must be sold at a specific price in order to make a specified profit. Can also be used to find out how many units must be sold to break-even

CVP formula:
No of units = (FC + Required Prof)/ Contribution per unit

Question 8

Break-even point

Answer 8

Fixed Cost / Contribution per Unit

Question 9

Margin of Safety

Answer 9

the amount by which anticipated sales can fall below budget before the business makes a loss. It can be calculated in units or as a % of sales

In units: MoS = Budgeted sales - break-even point

As a percentage: MoS = (Budgeted sales - break-even sales) / Budgeted sales x 100%

Question 10

Absorption Costing v Marginal Costing

Answer 10

Absorption Costing - Accounting for fixed costs within the cost per unit

Marginal Costing - Only removing fixed costs from total profit at the end. e.g. just using Contribution (Sales Price - VC per Unit) when analysing cost of goods