Podcast
Questions and Answers
What is the defining characteristic of the break-even point?
What is the defining characteristic of the break-even point?
- Variable costs are equal to fixed costs.
- Total revenue is equal to total costs. (correct)
- Total revenue exceeds total costs.
- Total costs exceed total revenue.
What is the primary focus of Cost-Volume-Profit (CVP) analysis?
What is the primary focus of Cost-Volume-Profit (CVP) analysis?
- Calculating the optimal sales mix for maximum revenue.
- Analyzing the impact of changes in fixed costs on profitability.
- Determining the break-even point only.
- Examining the relationships between costs, volume, and profit at various activity levels. (correct)
How does sales volume affect profitability relative to the break-even point?
How does sales volume affect profitability relative to the break-even point?
- Sales above the break-even point result in a loss.
- Sales below the break-even point result in a loss. (correct)
- Sales below the break-even point result in a profit.
- Sales volume has no effect on the profit or loss.
What is the role of contribution margin in CVP analysis?
What is the role of contribution margin in CVP analysis?
Which of the following is a typical short run decision that would benefit from a CVP analysis?
Which of the following is a typical short run decision that would benefit from a CVP analysis?
Using the provided Aussie Travel contribution margin example, what is the contribution margin in total?
Using the provided Aussie Travel contribution margin example, what is the contribution margin in total?
What does the unit contribution margin represent?
What does the unit contribution margin represent?
In CVP analysis, what is the first step in preparing an analysis?
In CVP analysis, what is the first step in preparing an analysis?
If a product sells for $25 per unit and incurs variable costs of $15 per unit, what is the contribution per unit?
If a product sells for $25 per unit and incurs variable costs of $15 per unit, what is the contribution per unit?
A product has a selling price of $50 and a variable cost of $30. What is the contribution to sales (C/S) ratio?
A product has a selling price of $50 and a variable cost of $30. What is the contribution to sales (C/S) ratio?
A company has fixed costs of $100,000, and a product with a contribution per unit of $20. What is the break-even point in units?
A company has fixed costs of $100,000, and a product with a contribution per unit of $20. What is the break-even point in units?
A company has fixed costs of $50,000, a contribution per unit of $10, and a sales price per unit of $25. What is the break-even point in dollar sales?
A company has fixed costs of $50,000, a contribution per unit of $10, and a sales price per unit of $25. What is the break-even point in dollar sales?
If a company's fixed costs are $75,000, and the desired profit is $25,000, and the contribution per unit is $10, what is the level of sales in units needed to achieve this profit?
If a company's fixed costs are $75,000, and the desired profit is $25,000, and the contribution per unit is $10, what is the level of sales in units needed to achieve this profit?
A company's fixed costs are $80,000, its target profit is $40,000, the sales price per unit is $50, and the contribution per unit is $20. What level of sales in dollars is required to reach this target profit?
A company's fixed costs are $80,000, its target profit is $40,000, the sales price per unit is $50, and the contribution per unit is $20. What level of sales in dollars is required to reach this target profit?
Using the marginal costing approach, which of the following will be deducted from contribution to arrive at net income?
Using the marginal costing approach, which of the following will be deducted from contribution to arrive at net income?
What is the formula to calculate the contribution per unit?
What is the formula to calculate the contribution per unit?
What is the core principle of marginal costing when calculating net profit?
What is the core principle of marginal costing when calculating net profit?
In cost-volume-profit (CVP) analysis, which of these is NOT a typical assumption?
In cost-volume-profit (CVP) analysis, which of these is NOT a typical assumption?
Port Williams Inc. has a net loss of €80,000 with sales of €800,000 and total costs of €880,000 (including €400,000 fixed costs). What is its total contribution margin?
Port Williams Inc. has a net loss of €80,000 with sales of €800,000 and total costs of €880,000 (including €400,000 fixed costs). What is its total contribution margin?
How does an increase in advertising expenditure affect the breakeven point, given normal conditions?
How does an increase in advertising expenditure affect the breakeven point, given normal conditions?
Firth Ltd. has fixed costs of €12,000, variable costs of €3 per unit, and a selling price of €9 per unit. How many units must they sell to break even?
Firth Ltd. has fixed costs of €12,000, variable costs of €3 per unit, and a selling price of €9 per unit. How many units must they sell to break even?
What is a primary weakness of break-even analysis?
What is a primary weakness of break-even analysis?
If 4000 drinks are sold, what is the total contribution?
If 4000 drinks are sold, what is the total contribution?
A company sells a drink for €2.50 per unit. What further information is needed to determine the breakeven point?
A company sells a drink for €2.50 per unit. What further information is needed to determine the breakeven point?
How can total variable costs be determined?
How can total variable costs be determined?
If 4000 drinks are sold, what is the net profit (or loss)?
If 4000 drinks are sold, what is the net profit (or loss)?
How many drinks need to be sold to reach the break-even point?
How many drinks need to be sold to reach the break-even point?
Which of the following is NOT a line shown on a traditional breakeven graph?
Which of the following is NOT a line shown on a traditional breakeven graph?
On a breakeven graph, the total cost line starts at:
On a breakeven graph, the total cost line starts at:
What does the intersection of the total sales revenue line and the total cost line represent on a breakeven graph?
What does the intersection of the total sales revenue line and the total cost line represent on a breakeven graph?
What does 'margin of safety' refer to on a breakeven graph?
What does 'margin of safety' refer to on a breakeven graph?
What is a key reason to use graphed CVP analysis?
What is a key reason to use graphed CVP analysis?
What is the contribution per unit for PWY plc?
What is the contribution per unit for PWY plc?
What is the total fixed cost for PWY plc?
What is the total fixed cost for PWY plc?
What is the breakeven sales volume in units for PWY plc?
What is the breakeven sales volume in units for PWY plc?
Approximately what is the margin of safety percentage for PWY plc?
Approximately what is the margin of safety percentage for PWY plc?
How many units must PWY plc sell to achieve a profit of €1,440?
How many units must PWY plc sell to achieve a profit of €1,440?
What is the effect of an increase in fixed costs on a break-even chart?
What is the effect of an increase in fixed costs on a break-even chart?
What effect does a change in variable costs and sales price have on a break-even chart?
What effect does a change in variable costs and sales price have on a break-even chart?
What does sensitivity analysis, also known as 'what if' analysis, explore?
What does sensitivity analysis, also known as 'what if' analysis, explore?
What does the margin of safety measure?
What does the margin of safety measure?
A company has expected sales of 500 units and a break-even point at 300 units. What is the margin of safety in units?
A company has expected sales of 500 units and a break-even point at 300 units. What is the margin of safety in units?
If a company has a margin of safety of 200 units and a sales price of $10 per unit, what is the margin of safety in dollars?
If a company has a margin of safety of 200 units and a sales price of $10 per unit, what is the margin of safety in dollars?
Product R2 has a selling price of €35 per unit, variable costs at €21 per unit, and fixed costs of €175,000. What is the break-even point in units?
Product R2 has a selling price of €35 per unit, variable costs at €21 per unit, and fixed costs of €175,000. What is the break-even point in units?
A company's margin of safety in units is 200, and expected sales are 1000 units. What is the margin of safety as a percentage?
A company's margin of safety in units is 200, and expected sales are 1000 units. What is the margin of safety as a percentage?
Flashcards
Break-even Point
Break-even Point
The point where total revenue equals total costs. Neither profit nor loss is generated.
Cost-Volume-Profit (CVP) Analysis
Cost-Volume-Profit (CVP) Analysis
The study of how changes in sales volume affect costs, profits, and overall financial performance.
Fixed Costs
Fixed Costs
Costs that remain constant regardless of production or sales volume.
Variable Costs
Variable Costs
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Contribution Margin
Contribution Margin
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Contribution Margin per Unit
Contribution Margin per Unit
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Break-even Analysis
Break-even Analysis
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CVP Analysis
CVP Analysis
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Marginal Cost
Marginal Cost
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Sales Mix
Sales Mix
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Constant Selling Price
Constant Selling Price
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Contribution per unit
Contribution per unit
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Contribution/sales ratio
Contribution/sales ratio
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Breakeven sales volume
Breakeven sales volume
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Margin of safety
Margin of safety
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Margin of safety percentage
Margin of safety percentage
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Contribution to Sales (C/S) Ratio
Contribution to Sales (C/S) Ratio
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Break-Even Point (Units)
Break-Even Point (Units)
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Break-Even Point (€ Sales)
Break-Even Point (€ Sales)
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Variable Costs (VC)
Variable Costs (VC)
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Fixed Costs (FC)
Fixed Costs (FC)
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Sales to Achieve Target Profit (Units)
Sales to Achieve Target Profit (Units)
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Sales to Achieve Target Profit (€ Sales)
Sales to Achieve Target Profit (€ Sales)
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Contribution
Contribution
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Net profit
Net profit
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Breakeven Graph
Breakeven Graph
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Total Cost Line
Total Cost Line
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Total Revenue Line
Total Revenue Line
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Margin of Safety (MoS)
Margin of Safety (MoS)
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Sensitivity Analysis
Sensitivity Analysis
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Margin
Margin
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Study Notes
Cost-Volume-Profit (CVP) Relationships
- CVP analysis studies the interconnectedness of costs, volume, and profit at various activity levels.
- Break-even point (BEP) is when costs equal revenue, resulting in zero profit or loss.
- Â Sales above the break-even point lead to profit.
- Â Sales below the break-even point lead to loss.
- Â CVP analysis focuses on cost and profit for activity levels beyond the break-even point.
Break-even Analysis
- Break-even point (BEP) is when costs equal revenue.
- At the break-even point, there is no profit or loss.
- Sales above the BEP lead to profit.
- Sales below the BEP lead to loss.
CVP Analysis
- CVP analysis examines how changes in activity level affect financial results.
- Understanding cost fluctuations with volume change allows managers to control costs.
- CVP analysis is useful for short-term decision-making.
- Determining pricing policies
- Multi-shift working
- Special order acceptance
Preparing CVP Analysis
- Step 1: Classify Costs
- Categorize costs into fixed, variable, and mixed.
- Step 2: Calculate Contribution
- Contribution represents the amount remaining after variable costs are covered, which then goes towards fixed costs.
- Contribution per unit = Selling Price – Variable Costs
- Example of Contribution Calculation:
- Sales revenue: €250,000
- Variable expenses: €100,000
- Fixed expenses: €170,000
- Contribution margin = €150,000
- Step 3: Calculate Breakeven
- Breakeven in units = Fixed Costs / Contribution per unit
- Breakeven (€ sales) = Fixed Costs / Contribution per unit x Sales Price/Unit
Example 1: Contribution Per Unit
- Selling price per unit: €40
- Variable costs per unit: €24
- Total fixed costs: €200,000
- Contribution per unit: €16
Example 2: Contribution to Sales Ratio
- Selling price per unit: €40
- Variable costs per unit: €24
- Total fixed costs: €200,000
- Contribution to sales ratio = 40%
Other Needed Formulae
- Contribution/Sales ratio = (Contribution per unit / Sales per unit) x 100
- Level of sales for target profit (units) = (Fixed Cost + target profit) / Contribution per unit
- Level of sales for target profit (€sales) = (Fixed Cost + target profit) x (Sales price/unit) / Contribution per unit
Marginal Costing
- Total Sales – Variable Costs – Fixed Costs = Net Income
- At break-even, net profit is zero.
- Sales – variable costs – fixed costs = zero (to reach break even)
Example 3 (Profit Target)
- A company with €10 sales price and €6 marginal cost has €60,000 fixed costs and €20,000 target profit.
- Determine needed level of sales using CVP formula.
Assumptions of CVP Analysis
- Constant selling price
- Linear costs (throughout a given relevant range)
- Costs can accurately be divided into fixed and variable components
- Multiproduct companies have consistent sales mixes
- Manufacturing companies' production equals sales quantities (i.e., no change in inventories)
Weaknesses of Breakeven Analysis
- Non-linear cost relationships
- Stepped fixed costs
- Multi-product businesses
Margin of Safety
- The difference between the expected sales and the break-even sales revenue.
- It indicates the cushion before losses are incurred.
- Expressed in units, euro amounts or percentages
Sensitivity Analysis
- "What if" analysis, examining how changes in sales price, costs, or sales mix will affect the results.
Graph Methods
- Break-even graphs illustrate relationships between costs, revenue, and volume.
- Show total revenue, total costs, and fixed costs.
- CVP analysis graphs aid understanding with visual representations of sales volume against costs and revenue.
- Changes in costs and/or revenues will be shown with additional lines on the charts.
Example Scenarios
- Specific scenarios, examples, and solutions are provided for calculating needed sales volume to reach various profitability levels. Detailed worked examples are included to aid understanding.
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