P2C.1 Cost Volume Profit Analysis

Question 1

CVP Analysis

Answer 1

1. AKA break-even analysis
2. Applies to short-term planning
3. Examines relationship between costs & profits
4. Useful when comparing the relative profit potential under different cost structure scenarios.

Question 2

CVP Assumptions

Answer 2

1. Units produced = units sold
2. Sales price, variable cost per unit and total fixed costs remains constant
3. Total expenses are either variable or fixed
4. Time value of money isn’t considered
5. Sales mix remains constant

Question 3

Breakeven Formula

Answer 3

0 = Price - variable cost - fixed costs

Breakeven quantity is the volume of output at which revenues are equal to total costs.

Question 4

Breakeven Point (Units)

Answer 4

= Total fixed costs / Contributions margin per unit

Question 5

Breakeven Point (Dollars)

Answer 5

= Total fixed costs / Contribution ratio

Question 6

Relationship between Variables

Answer 6

Direct relationship
1. Costs & Breakeven Point

Inverse relationship
1. Sales price & Breakeven Point

Question 7

Required sales for Target Profit (Units)

Answer 7

= Total Fixed Costs + Pre-tax Profit Target / Contribution Margin per Unit

Question 8

Required sales for Target Profit (Dollars)

Answer 8

= Total Fixed Costs + Pre-tax Profit Target / Contribution Margin Ratio

Question 9

Pretax Profit Target

Answer 9

= After-tax Profit Target / (1 - Tax Rate)

Question 10

Weighted Average Contribution Margin per Unit (WACM)

Answer 10

= (CMP1 × SMP1) + (CMP2 × SMP2) + (CMP3 × SMP3) + · ·

CM =  Contribution margin
SM = Sales mix proportion
P = Product (1, 2, 3, etc.)

Question 11

Multiple Product Breakeven Point

Answer 11

= Total Fixed Costs / WACM

Question 12

Margin of Safety Ratio

Answer 12

Amount by which sales can drop before incurring a loss.

Question 13

Margin of Safety Formula (Units or Dollars)

Answer 13

= Actual (or Planned Sales) - Breakeven Sales

Question 14

Margin of Safety Ratio (%)

Answer 14

= Margin of Safety / Actual (or Planned Sales)

= (Sales - breakeven point) / Sales