Module 3 Contribution

Question 1

Contribution

Answer 1

Contribution = sales - variable costs

Question 2

Cost-volume-proft (CVP) assumptions

Answer 2

• Variable cost per unit is constant
• Total variable cost increases and decreases with sales volume
• Total fixed costs do not change
• Average selling price per unit is constant and not affected by sales volume
• Total sales revenue increases and decreases with sales volume

Question 3

CVP can assits calcuating the expected effect on profit of:

Answer 3

• changes in product mix;
• advertising campaigns;
• sales promotion and discount campaigns;
• price changes; and
• changes in the method of paying salespeople.

Question 4

C/S Ratio

Answer 4

C/S Ratio = Contribution per unit / Sales price per unit

Question 5

Break-Even point

Answer 5

• The break-even point is the point at which an organisation has zero profit therefore is no longer loss-making
• Expressed in revenue or in level of sales

Question 6

Breaks - even units

Answer 6

Breaks-even units = Fixed costs / Contribution per unit

Question 7

Breaks-even revenue

Answer 7

Breaks-even revenue = Fixed costs / CS Ratio

Question 8

Break-Even Price

Answer 8

• This is the maximum which the business can afford to pay to purchase a raw material or hour of labour before becoming loss-making

Question 9

Break-Even Price Formula

Answer 9

Break-even price = (available profit + current cost) / total usage required

Question 10

Target Profit

Answer 10

• similar to the break-even profit calculation only in this case we have a target profit that is not equal to nil.
• turn the profit statement upside-down

Question 11

Margin of Safety

Answer 11

• The extent to which sales may fall below their existing level before break-even point is reached
• Represents a cushion available to the business
• The lower the margin of safety, the more risk

Question 12

Margin of safety (in units)

Answer 12

Margin of safety (in units) = units sold – break even units

Question 13

Margin of safety (%)

Answer 13

Margin of safety (%) = (units sold – break even units) / units sold

or

Margin of safety (%) = (sales revenue – break even revenue) / sales revenue

Question 14

Margin of safety (in £)

Answer 14

Margin of safety (in £) = sales revenue – break even revenue