Semester Test 2

Question 1

What’s the purpose of CVP analysis

Answer 1

Helps managers understand the interrelationship btwn cost, volume, and profit in an org by focusing on interactions btwn;
- Prices of products
- Volume per level of activity
- Per unit variable costs
- Total fixed costs
- Mis of products sold

Question 2

What is the contribution statement format

Answer 2

Sales
(Variable costs)
= Contribution Margin
(Fixed costs)
= Net profit

Question 3

Contribution margin ratio =

Answer 3

Contribution margin / Sales

• Change in Contribution margin = CM ratio x Change in revenue

Question 4

What is the equation method

Answer 4

Profits = Sales - (Variable expenses + Fixed expenses)

which can be rearranged to

Revenue = VC + FC + Profits

Question 5

Using the eqn method (Profits = Sales - (Variable expenses + Fixed expenses), calc break even point if variable expenses = 25, fixed expenses = 200 000, and selling price = 30

Answer 5

Profits = Sales - (Variable expenses + Fixed expenses)

rearranged as

Revenue = VC + FC + Profits

Let Q = BEP in units

30Q = 25Q + 200 000 + 0 (@BEP profits its always = 0)

5Q = 200 000
Q = 40 000 units

In R BEP = 40 000 x 30
= R1 200 000

Question 6

BEP using contribution method

Answer 6

BEP(in units) = Fixed costs / Contribution margin (units)

BEP(in revenue) = Fixed costs / CM ratio

Question 7

Margin of safety =

Answer 7

Total sales – Break-even sales

Question 8

What is margin of safety

Answer 8

• Excess of budgeted (or actual) sales over the break-even
  volume of sales.
• The amount by which sales can drop before losses begin to be incurred

Question 9

What is operating leverage

Answer 9

• A measure of how sensitive profit is to percentage changes in sales

Question 10

Degree of operating leverage =

Answer 10

Contribution margin / Profit

Question 11

What are the 4 assumption of CVP analysis

Answer 11

• Selling price is constant throughout the entire relevant range.
• Costs are linear throughout the entire relevant range
• In multi-product companies, the sales mix is constant
• In manufacturing companies, inventories do not change (units produced = units sold)

Question 12

Increase in sales =

Answer 12

Change in sales (as %) x Operating leverage

Question 13

Briefly discuss one advantage of using the FIFO method, rather than the weighted average method.

Answer 13

• FIFO provides more accurate information w/ regards to costs added last month (LM) compared to costs added this month (TM).
• If there are major differences between LM cost per unit compared to TM, FIFO will highlight it, whereas WA will not pick it up, as the costs of LM and TM are added together