Lecture 5

Question 1

How is cost-volume-product (CVP) used by companies

Answer 1

Cost-Volume-Profit (CVP) analysis is used by businesses to understand the relationships between costs, sales volume, and profit

Question 2

What does CVP help companies determine

Answer 2

CVP helps companies determine how changes in cost and volume affect their profits, helping them plan for profitability

Question 3

What are the different uses of CVP analysis

Answer 3

Uses of CVP analysis are:
- Profit planning
- Break-even analysis
- Pricing decisions
- Cost structure analysis
- Sensitivity analysis
- Decision-making

Question 3

How can businesses estimate their profits at various levels of sales with CVP

Answer 3

By analysing how costs and revenues change with different levels of production or sales, businesses can estimate their profits at various levels of sales

Question 4

What is the break even point

Answer 4

Break even point is where total revenues = total costs

Question 5

How does CVP help businesses assess the impact of pricing changes on profitability

Answer 5

It helps businesses assess the impact of pricing changes on profitability by analysing the relationship between price, costs, and sales volume

Question 6

How can CVP analyse price sensitivity

Answer 6

CVP analysis can model how sensitive profits are to changes in costs, volume, or selling prices

Question 7

How can CVP help with decision making

Answer 7

For decisions like adding or discontinuing products, entering new markets, or making special offers, CVP analysis helps evaluate the financial impact

Question 8

What are the key assumptions of CVP analysis

Answer 8

Key assumptions of CVP analysis are:
- Linear revenue and costs
- Constant sales price
- Fixed costs remain constant
- Only one product or constant product mix
- No inventory changes
- Constant efficiency

Question 9

What is used for CVP analysis if multiple products are used

Answer 9

If multiple products are used for CVP analysis a weighted average contribution margin is often used

Question 10

Contribution margin =

Answer 10

Contribution margin = Sales - Variable Costs

Question 11

Contribution margin per unit =

Answer 11

Contribution margin per unit = Selling price per unit - Variable cost per unit

Question 12

Contribution margin ratio =

Answer 12

Contribution margin ratio = Contribution margin per unit / Selling price per unit X 100

Question 13

Break even point (units) =

Answer 13

Break even point (units) = Total fixed costs / Contribution margin per unit

Question 14

Break even point (£) =

Answer 14

Break even point (£) = Total fixed costs / Contribution margin ratio

Question 15

Target profit (units) =

Answer 15

Target profit (units) = (Total fixed cost + Target profit) / Contribution margin per unit

Question 16

Required sales (£) =

Answer 16

Required sales (£) = (Total fixed costs + Target profit) / Contribution margin ratio

Question 17

What does CVP analysis help managers assess

Answer 17

CVP analysis helps managers assess how changes in costs, sales volume, and product prices impact profits

Question 18

How is CVP analysis is applied in various management decision-making contexts

Answer 18

CVP analysis is applied in various management decision-making contexts:
- Break-even analysis
- Pricing decisions
- Profit planning and forecasting
- Cost structure analysis
- Decisions to add or discontinue products
- Make-or-buy decisions
- Target profit planning
- Risk assessment and sensitivity analysis
- Optimization of production and operational efficiency
- Evaluating special orders and promotions

Question 19

How can CVP analysis help managers decide on the optimal selling price

Answer 19

CVP analysis helps managers decide on the optimal selling price by calculating how changes in price affect profitability

Question 20

How does CVP help with profit planning

Answer 20

CVP helps in setting realistic profit targets and planning for various scenarios

Question 21

What can managers plan for if they understand how fixed and variable costs behave

Answer 21

By understanding how fixed and variable costs behave, managers can plan for various production and sales levels to maximize profitability

Question 22

What does cost structure show

Answer 22

Cost structure shows how changes in production volume will affect the company’s costs and profit margins

Question 23

How can managers use cost structure analysis

Answer 23

Managers can use cost structure analysis to adjust cost structures to achieve more favourable outcomes

Question 24

How does CVP help managers to decide to add a new product or discontinue an existing one

Answer 24

When deciding whether to add a new product or discontinue an existing one, managers can use CVP analysis to evaluate the potential profitability of the new or continuing product

Question 25

What do managers compare for make or buy decisions

Answer 25

With make or buy decisions managers compare the costs of both options, managers can identify the most financially beneficial choice