L3/L4 Cost-Volume-Profit Analysis

Question 1

Define CVP Analysis

Answer 1

examines the behaviour of sales, costs and profit as changes occur in the output level, selling price or costs.

Question 2

CM Equation

Answer 2

Selling costs-Variable costs

Question 3

Breakeven point equations

Answer 3

Total revenues=Total costs

Question 4

Define revenue driver

Answer 4

A factor that affects revenue

Question 5

Define Cost driver

Answer 5

A factor that affects cost

Question 6

What are the 6 assumptions of CVP

Answer 6

1) Total costs can be split into FCs and VCs
2) The behaviour of TRs and TCs is linear in relation to output units within RR
3) The USP, unit VC and FCs are known and are constant.
4)The analysis either covers a single product or assumes that the proportion of different products when multiple products are sold will remain constant as the level of total units sold changes.
5) All revenues and costs can be added and compared without taking into account the time value of money.
6) Changes in the level of revenues and costs arise only because of changes in the number of products (or service) units produced and sold. The number of output units is the only revenue and cost driver.

Question 7

How to solve BE point unit (equation method)

Answer 7

Revs-VC-FC=OP (OP=0)

Question 8

How to solve BE point unit (CM method)

Answer 8

FCs/CM per unit or CM Ratio

Question 9

Target OP (equation method)

Answer 9

Revs-VC-FCs= Target OP

Question 10

Target OP (CM Method)

Answer 10

(FCs+ Target OP)/ CM per unit or CM ratio

Question 11

CM Ratio

Answer 11

CM/Sales

Question 12

PV graph

Answer 12

in textbook

Question 13

Equation method for taking income taxes in account

Answer 13

Target net profit/(1-tax rate)====Revs-FCs-VCs

Question 14

Define Margin of Safety

Answer 14

excess of budgeted revenues over the breakeven revenues

Question 15

Margin of Safety equation (£)

Answer 15

Budgeted revenue- Breakeven revenues

Question 16

Breakeven revenue

Answer 16

Breakeven units x Selling Price

Question 17

Budgeted Revenues

Answer 17

Units x Selling Price

Question 18

Margin of Safety (units)

Answer 18

MoS/ selling price

Question 19

CM Format

Answer 19

Revenue
(VCs)
=CM
(FCs)
=OP

Question 20

Define Operating Leverage

Answer 20

Sensitivity of NOI to changes in Sales

Question 21

Higher the operating leverage

Answer 21

higher will be the sensitivity of operating income to changes in level of sales

Question 22

A risk averse manager will prefer…?

Answer 22

Lower operating leverage and vice-versa

Question 23

Characteristic of Multi Product CVP

Answer 23

–Companies often sell more than one product
–Critical decision: what mix of products to sell
–Important because different products have substantially different contribution margins
–Operating income will be greater if more high CM units are sold than low CM units

Question 24

Steps for B.E. in a multiproduct setting

Answer 24

1) Calculate the weighted average CM of all products
2) Calculate BE points in units

Question 25

Weighted average CM of all products

Answer 25

(Product 1 Unit CM x % sales) + (Product 2 Unit CM x % Sales)

Question 26

Break even points in units (Multi Product CVP)

Answer 26

FCs/Weight Average CM