E1-breakeven analysis

Question 1

1. breakeven point

Answer 1

1. in accounting , the break-even point formula is determined by dividing and the total fixed costs associated with production by the revenue per individual unit minus the variable costs per unit.
2. the breakeven point is the production level at which total revenues for a product equal total expenses.

Question 2

2. PROFIT–VOLUME (PV)CHART

Answer 2

1. a profit-volume chart is a graphic that shows the earnings (or losses) of a company in relation to its volume of sales.
2. companies can use profit-volume (pv) charts to establish sales goals, analyze whether new products are likely to be profitable, or estimate breakeven points.

Question 3

3.1 multi products p/v chart analysis

Answer 3

1. the horizontal line
   fixed cost line which does not change at different activity levels within the relevant range.
2. the straight line
   represents the weighted average contribution line at different sales levels assuming that the expected sales mix remains constant.

Question 4

3.3 multi products p/v chart analysis

Answer 4

1. Point C:
   at the other extreme point C represents the total revenue and profit that is expected for the month based on the expected sales volumes for all the products.
2. POINT X1 & X2
   -point x1 is the break-even point on this line.
   -point x2 is the break-even point on the weighted average contribution line.
   -as you can see the break-even point is lower (and therefore reached sooner) on this line than on the weighted average contribution line.

Question 4

3.2 multi products p/v chart analysis

Answer 4

Points A and B

1. points A and B are at sales volumes between zero and the total expected sales of point C.
2. each of these points assumes that we will sell our products in order of profitability where profitability is measured based on the C/S ratio.
3. the C/S ratio is essentially the contribution margin per product to the selling price per… and indicates for every $1 of revenue generated, how much that … will contribute towards the fixed costs of the business.
4. clearly, if we sell the product with the highest contribution, then it means that we will cover the fixed costs more quickly than if we were to sell the products in the planned proportions.

Question 5

3.4 the difference between the two lines

Answer 5

1. the line between points O and C represents the expected revenue at different revenue levels assuming that the mix of sales that we expect is kept the same regardless of the level of total revenue.
2. the line which connects point A,B and C is the line that represents the relationship between revenue and revenue on the assumption that we sell the products in order of profitability (measured as the C/S ratio)

Question 6

4. benefits of breakeven analysis

Answer 6

1. the chart is useful because it gives us an idea of the sales level required to cover our fixed costs.
2. by knowing the break-even position, it helps to understand the margin of safety that we have from the forecast or budgeted figures.
   - the margin of safety is the amount by which revenue can fall from the expected revenue before a loss is made. the margin of safety is usually measured as a percentage.
3. this information is useful because it might help management to decide if it is worthwhile focusing on most profitable products sales above the other two products so that fixed costs of production can be covered more quickly.

Question 7

5. limitations of breakeven analysis

Answer 7

1. it is likely that we will not be able to sell the products in the order of their respective contribution to sales ratios.
2. equally, it is unlikely that will sell our products at a constant sales mix.
   - the true break-even is probably going to lie somewhere between the two lines.
3. the figures used are estimates only and assume a linear relationship over the whole range of production.
4. the analusisi also assumes that we can define costs as fixed or variable.
   - in reality all costs are variable in the long term and in the shor term many costs that we think of as variable are fixed, for example, labour costs.
   - the fixed costs included represent specific fixed costs + allocated a share of general ixed overhead costs.

Question 8

6. cost-volume -profit analysis

Answer 8

cost-volume-profit(CVP) analysis is used to determine how changes in costs and volume affect a company`s operating income and net income. in performing this analysis, there are several assumptions made, including:

• sales price unit is constant
• variable costs per unit are constant
• total fixed costs are constant
• everything produced is sold
• costs are only affected because activity changes
• if a company sells more than one product, they are sold in the same mix.

Question 9

7. the benefit of CVP analysis

Answer 9

1. it indicates the lowest amount of activity needed before we make losses.
2. it helps decision making as it explains the relationship between cost , volume and profit.
3. it can be extended using “what-if” or sensitivity analysis to explain how changes in the relationship between fixed and variable costs or in revenues will affect profit levels and breakeven.

Question 10

8. limitations of CVP analysis

Answer 10

1. we have assumed a constant sales mix but this may not actually occurs.
2. it is als based on our assumptions about the behaviour of revenue, costs and volume. other factors like changes in selling price, uint input costs and efficiency will affect profits but are not considered.
3. we have assumed that all costs can be divided into fixed and variable elements and that fixed costs remain constant over the relevant range of the CVP analysis.