Cost-Volume-Profit Analysis Quiz

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Questions and Answers

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?

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?

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?

It represents the amount available to cover fixed costs after variable costs are met. Signup and view all the answers

Which of the following is a typical short run decision that would benefit from a CVP analysis?

Choosing a sales mix Signup and view all the answers

Using the provided Aussie Travel contribution margin example, what is the contribution margin in total?

€150,000 Signup and view all the answers

What does the unit contribution margin represent?

The amount each unit sold contributes towards fixed costs and therefore profit. Signup and view all the answers

In CVP analysis, what is the first step in preparing an analysis?

Classifying costs into fixed, variable, and mixed Signup and view all the answers

If a product sells for $25 per unit and incurs variable costs of $15 per unit, what is the contribution per unit?

$10 Signup and view all the answers

A product has a selling price of $50 and a variable cost of $30. What is the contribution to sales (C/S) ratio?

40% Signup and view all the answers

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?

5000 Signup and view all the answers

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?

$125,000 Signup and view all the answers

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?

10,000 units Signup and view all the answers

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?

$300,000 Signup and view all the answers

Using the marginal costing approach, which of the following will be deducted from contribution to arrive at net income?

Fixed Costs Signup and view all the answers

What is the formula to calculate the contribution per unit?

Selling price per unit - variable costs per unit. Signup and view all the answers

What is the core principle of marginal costing when calculating net profit?

Net profit equals sales less total costs (variable and fixed) Signup and view all the answers

In cost-volume-profit (CVP) analysis, which of these is NOT a typical assumption?

Total costs remain constant Signup and view all the answers

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?

€480,000 Signup and view all the answers

How does an increase in advertising expenditure affect the breakeven point, given normal conditions?

It will increase the breakeven point. Signup and view all the answers

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?

2,000 Signup and view all the answers

What is a primary weakness of break-even analysis?

It assumes linear cost and revenue relationships. Signup and view all the answers

If 4000 drinks are sold, what is the total contribution?

€4000 Signup and view all the answers

A company sells a drink for €2.50 per unit. What further information is needed to determine the breakeven point?

The variable costs and fixed costs incurred, per unit and/or in total Signup and view all the answers

How can total variable costs be determined?

By multiplying the variable cost per unit by the number of units sold Signup and view all the answers

If 4000 drinks are sold, what is the net profit (or loss)?

€1300 loss Signup and view all the answers

How many drinks need to be sold to reach the break-even point?

2700 Signup and view all the answers

Which of the following is NOT a line shown on a traditional breakeven graph?

Variable Costs Signup and view all the answers

On a breakeven graph, the total cost line starts at:

The level of fixed costs on the vertical axis Signup and view all the answers

What does the intersection of the total sales revenue line and the total cost line represent on a breakeven graph?

The breakeven point Signup and view all the answers

What does 'margin of safety' refer to on a breakeven graph?

The area between budgeted sales and breakeven sales Signup and view all the answers

What is a key reason to use graphed CVP analysis?

When it is important to avoid numerical approaches Signup and view all the answers

What is the contribution per unit for PWY plc?

€1.20 Signup and view all the answers

What is the total fixed cost for PWY plc?

€2,720 Signup and view all the answers

What is the breakeven sales volume in units for PWY plc?

3,400 units Signup and view all the answers

Approximately what is the margin of safety percentage for PWY plc?

14.3% Signup and view all the answers

How many units must PWY plc sell to achieve a profit of €1,440?

6,000 units Signup and view all the answers

What is the effect of an increase in fixed costs on a break-even chart?

It shifts the point of intersection and alters the break-even point, but the slope of the total cost line remains unchanged. Signup and view all the answers

What effect does a change in variable costs and sales price have on a break-even chart?

It alters the slope of the lines, thus affecting the break-even point and the shape of the profit and loss wedges. Signup and view all the answers

What does sensitivity analysis, also known as 'what if' analysis, explore?

It explores how changes in sales price, costs, and sales mix impact financial outcomes. Signup and view all the answers

What does the margin of safety measure?

The amount by which sales can decline before incurring a loss. Signup and view all the answers

A company has expected sales of 500 units and a break-even point at 300 units. What is the margin of safety in units?

200 units Signup and view all the answers

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?

$2,000 Signup and view all the answers

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?

12,500 Signup and view all the answers

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?

20% Signup and view all the answers

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.
Sales above the break-even point lead to profit.
Sales below the break-even point lead to loss.
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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Description

Test your understanding of Cost-Volume-Profit (CVP) analysis with this quiz, featuring key concepts like break-even point and contribution margins. Answer questions on how sales volume influences profitability and the first steps in conducting a CVP analysis. Perfect for students and professionals looking to reinforce their knowledge in financial analysis.