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What is the break-even point?
What is the break-even point?
The contribution per unit is calculated by adding the variable cost per unit to the sales price per unit.
The contribution per unit is calculated by adding the variable cost per unit to the sales price per unit.
False
What formula is used to determine the break-even point in units?
What formula is used to determine the break-even point in units?
Break-even point = Total fixed costs / Contribution per unit
The contribution per unit for this scenario is calculated by subtracting the variable cost per unit from the ________ per unit.
The contribution per unit for this scenario is calculated by subtracting the variable cost per unit from the ________ per unit.
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If the sales price per unit is $8 and the variable cost per unit is $5, what is the contribution per unit?
If the sales price per unit is $8 and the variable cost per unit is $5, what is the contribution per unit?
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Match the following terms with their definitions:
Match the following terms with their definitions:
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The safety margin is the amount by which actual sales can exceed anticipated sales.
The safety margin is the amount by which actual sales can exceed anticipated sales.
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What is the required contribution for Seven League Boots to achieve a profit of $70,000 with fixed costs of $119,000?
What is the required contribution for Seven League Boots to achieve a profit of $70,000 with fixed costs of $119,000?
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The total contribution must remain constant for a price increase to maintain the same profit level.
The total contribution must remain constant for a price increase to maintain the same profit level.
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What is the unit contribution if the sales price is $20 and the variable cost is $12?
What is the unit contribution if the sales price is $20 and the variable cost is $12?
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The C/S ratio is calculated by dividing the contribution per unit by the ________.
The C/S ratio is calculated by dividing the contribution per unit by the ________.
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A decrease in sales price will always lead to an increase in total profit.
A decrease in sales price will always lead to an increase in total profit.
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To keep total profits constant, the minimum sales volume must also remain constant when the sales price increases.
To keep total profits constant, the minimum sales volume must also remain constant when the sales price increases.
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What does the contribution to sales (C/S) ratio measure?
What does the contribution to sales (C/S) ratio measure?
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The breakeven point is reached when total contribution exceeds total fixed costs.
The breakeven point is reached when total contribution exceeds total fixed costs.
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Match the following financial terms with their definitions:
Match the following financial terms with their definitions:
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The safety margin can indicate how much actual sales can decline before reaching the breakeven point.
The safety margin can indicate how much actual sales can decline before reaching the breakeven point.
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Match the following calculations with their concepts:
Match the following calculations with their concepts:
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If a company has a C/S ratio of 45%, then its variable cost to sales ratio is 55%.
If a company has a C/S ratio of 45%, then its variable cost to sales ratio is 55%.
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What is the safety margin for a company with budgeted sales of 8,000 units and a breakeven point of 7,000 units?
What is the safety margin for a company with budgeted sales of 8,000 units and a breakeven point of 7,000 units?
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If Betty Battle's selling price increases to $21 and the variable cost decreases to $9, what will be the new contribution margin per unit?
If Betty Battle's selling price increases to $21 and the variable cost decreases to $9, what will be the new contribution margin per unit?
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A breakeven chart shows the relationship between sales volume and total costs only.
A breakeven chart shows the relationship between sales volume and total costs only.
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The segmented area between the breakeven point and expected sales in units indicates the _____ margin.
The segmented area between the breakeven point and expected sales in units indicates the _____ margin.
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Match the following terms with their definitions:
Match the following terms with their definitions:
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The total costs line on a breakeven chart starts at the origin.
The total costs line on a breakeven chart starts at the origin.
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Match the following costs with their types:
Match the following costs with their types:
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A profit/volume (P/V) chart only illustrates costs at various sales levels.
A profit/volume (P/V) chart only illustrates costs at various sales levels.
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The fixed costs on the breakeven chart are represented by a straight line parallel to the _____ axis.
The fixed costs on the breakeven chart are represented by a straight line parallel to the _____ axis.
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What does the gradient of the profit-volume (P/V) line represent?
What does the gradient of the profit-volume (P/V) line represent?
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The profit-volume line starts at the origin (0,0) on the graph.
The profit-volume line starts at the origin (0,0) on the graph.
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The profit-volume chart helps in visualizing the relationship between ______ and profit.
The profit-volume chart helps in visualizing the relationship between ______ and profit.
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Match the following terms with their definitions:
Match the following terms with their definitions:
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What happens to the breakeven point if the selling price is increased and demand decreases?
What happens to the breakeven point if the selling price is increased and demand decreases?
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The variable cost per unit is assumed to be constant at all levels of production in breakeven analysis.
The variable cost per unit is assumed to be constant at all levels of production in breakeven analysis.
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In terms of unit sales, to calculate the sales revenue at breakeven, one would use the formula ______ / contribution margin.
In terms of unit sales, to calculate the sales revenue at breakeven, one would use the formula ______ / contribution margin.
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Which of the following is NOT a limitation of breakeven analysis?
Which of the following is NOT a limitation of breakeven analysis?
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Study Notes
Cost-Volume-Profit (CVP) Analysis and Break-Even
- Cost-volume-profit (CVP) analysis examines the relationship between costs, sales volume, and profit, focusing on budgeting and profit projections.
- Break-even point (BEP) is the sales level at which total revenue equals total costs, resulting in zero profit.
- Safety margin indicates how much actual sales can drop below anticipated sales before incurring a loss.
Break-Even Point Calculation
- Break-even formula:
[ \text{Break-even Point} = \frac{\text{Total Fixed Costs}}{\text{Contribution per Unit}} ] - Contribution per unit calculated as:
[ \text{Contribution per Unit} = \text{Sales Price per Unit} - \text{Variable Cost per Unit} ] - Example calculation:
- Expected sales: 10,000 units at 8eachtotals8 each totals 8eachtotals80,000.
- Variable cost: 5perunitleadstoacontributionof5 per unit leads to a contribution of 5perunitleadstoacontributionof3 per unit.
- Fixed costs: 21,000;thus,BEP=(21,0003=7,000)unitsor21,000; thus, BEP = (\frac{21,000}{3} = 7,000) units or 21,000;thus,BEP=(321,000=7,000)unitsor56,000 in revenue.
Contribution to Sales (C/S) Ratio
- C/S ratio reflects the contribution earned per dollar of sales; also termed the profit/volume ratio.
- C/S ratio formula for break-even in terms of sales revenue:
[ \text{Break-even Sales Revenue} = \frac{\text{Fixed Costs}}{\text{C/S Ratio}} ] - Example: A product with a C/S ratio of 37.5% indicates that 0.375contributionisearnedper0.375 contribution is earned per 0.375contributionisearnedper1 of sales.
Safety Margin
- Safety margin quantifies the buffer between budgeted sales and break-even sales volume, expressed in units or as a percentage.
- Example calculation: With budgeted sales of 8,000 units and a BEP of 7,000 units, the safety margin is 1,000 units or 12.5%.
Profit Targets
- To achieve target profit, sales revenue must cover total variable costs, total fixed costs, and desired profit.
- Target profit formula:
[ S = V + F + P ]
where ( S ) = sales revenue, ( V ) = total variable costs, ( F ) = total fixed costs, and ( P ) = target profit. - Example: If fixed costs are 68,000andrequiredprofitis68,000 and required profit is 68,000andrequiredprofitis16,000, then required contribution is $84,000.
Changes in Sales Price or Costs
- Adjusting sales price or costs requires recalculating sales volumes to maintain profit levels.
- Example: Increasing the selling price but losing sales volume necessitates calculating the new required sales volume to preserve profit.
Break-even and Profit/Volume Charts
- Break-even charts visually depict sales levels at which a company meets costs with various sales volumes.
- The intersection of the sales line and total costs line represents the break-even point.
- Profit/Volume (P/V) charts illustrate relationships among sales, profit, and safety margins, allowing assessment of price changes' effects on profitability.
Example of Breakeven Analysis with Charts
- Using a factory with fixed costs of 40,000andvariablecostsof40,000 and variable costs of 40,000andvariablecostsof0.50 per unit:
- Budgeted sales at 120,000 units yield a breakeven output point derivation leading to visual interpretation of profits/losses at different sales volumes.### Profit/Volume (P/V) Charts
- P/V charts illustrate the relationship between profit and sales volume, identifying breakeven points and profit/loss scenarios.
- Breakeven point is a critical metric indicating the volume at which total revenues equal total costs.
- Breakeven point 1 occurs at 80,000 units; breakeven point 2 drops to 71,429 units with a price increase, showing a lower sales revenue threshold for cover costs.
Budgeted Profits and Sales Volume
- With a budgeted price increase to 1.20anddemanddroppingto105,000units,contributionbecomes1.20 and demand dropping to 105,000 units, contribution becomes 1.20anddemanddroppingto105,000units,contributionbecomes73,500.
- Total profit under these conditions is 23,500afteraccountingforfixedcostsof23,500 after accounting for fixed costs of 23,500afteraccountingforfixedcostsof50,000.
- Sales above 50,000 units yield higher profits at the new price; below this threshold, losses are greater with the increased price.
Advantages of P/V Charts
- P/V charts convey changes in selling price, variable costs, fixed costs, and sales demand clearly compared to traditional breakeven charts.
- They can integrate variable cost changes, depicting profit/loss at varying levels of output.
- An increase in variable cost to 0.60over120,000unitsresultsinacontributionof0.60 over 120,000 units results in a contribution of 0.60over120,000unitsresultsinacontributionof52,000, leading to a total profit of $12,000 at 130,000 units.
Limitations of Cost Volume Profit (CVP) Analysis
- Breakeven analysis best applies to single products or products produced in a constant mix, limiting broader applicability.
- Time-intensive preparation may hinder effective use for rapid decision-making.
- Assumes fixed costs remain constant, which may not hold true in real-world scenarios.
- Variable costs per unit and sales prices are assumed stable at all output levels.
- Ignores inventory levels by equating production directly with sales.
- Lacks consideration for uncertainties in cost estimations, risking decision quality.
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Description
This quiz explores the fundamentals of cost-volume-profit (CVP) analysis and break-even analysis. It examines how these concepts help organizations understand the relationships between costs, volume, and profit at different activity levels. We'll also cover the significance of the break-even point in financial decision-making.
