Cost-Volume-Profit (CVP) Analysis Quiz

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Questions and Answers

What is the contribution margin ratio if the total sales amount to $150 and the variable costs are $90?

  • 0.40 or 40% (correct)
  • 0.25 or 25%
  • 0.50 or 50%
  • 0.60 or 60%

Which of the following assumptions is NOT part of cost-volume-profit analysis?

  • The behavior of costs is nonlinear. (correct)
  • Sales mix remains constant for multi-product entities.
  • Unit price and cost data remain constant.
  • Fixed costs remain constant over the relevant range.

How can break-even data assist in decision-making?

  • By predicting future sales figures with certainty.
  • By eliminating fixed costs from the analysis.
  • By identifying the number of products needed to achieve profit targets. (correct)
  • By ensuring that all costs are variable.

What classification describes costs that do not change with the level of goods or services produced?

<p>Fixed costs (B)</p> Signup and view all the answers

In resource-limited decision-making, what is crucial to understand for effective planning?

<p>The contribution margin for all products. (D)</p> Signup and view all the answers

Which of the following is a key assumption underlying cost–volume–profit analysis?

<p>Selling price per unit remains constant at all levels of output. (D)</p> Signup and view all the answers

What does a break-even analysis specifically calculate?

<p>The total revenue at which total costs equal total expenses. (C)</p> Signup and view all the answers

Which of the following describes a fixed cost?

<p>Costs that remain unchanged in total despite changes in activity level. (D)</p> Signup and view all the answers

What are variable costs primarily influenced by?

<p>Activity level of production. (A)</p> Signup and view all the answers

In analyzing profitability under resource limitations, which factor is most critical?

<p>The optimal production mix that maximizes profit. (A)</p> Signup and view all the answers

How does the contribution margin ratio assist in CVP calculations?

<p>It indicates how sales affect overall profitability after covering fixed costs. (A)</p> Signup and view all the answers

Which statement about mixed costs is true?

<p>Mixed costs contain both fixed and variable cost components. (C)</p> Signup and view all the answers

When assessing relevant information for decision making, which aspect is usually less important?

<p>Sunk costs already incurred. (A)</p> Signup and view all the answers

What does break-even analysis determine?

<p>The level of sales needed to cover total costs (C)</p> Signup and view all the answers

Which of the following correctly defines the contribution margin?

<p>Total revenue minus variable costs (D)</p> Signup and view all the answers

When costs are classified as 'fixed,' what occurs if the activity level exceeds the relevant range?

<p>The expected behaviour of costs can change (A)</p> Signup and view all the answers

What is the formula for calculating the break-even point in units?

<p>Fixed costs divided by contribution margin (D)</p> Signup and view all the answers

In the unit formula for desired profit, what is added to the fixed costs?

<p>Desired profit (B)</p> Signup and view all the answers

What happens to the break-even point if variable costs increase while fixed costs remain constant?

<p>It increases (D)</p> Signup and view all the answers

How is the contribution margin ratio expressed?

<p>Contribution margin divided by total revenue (A)</p> Signup and view all the answers

Which cost classification changes when production volume changes significantly?

<p>Fixed costs (B)</p> Signup and view all the answers

If total revenue exceeds total costs, what is the result?

<p>Profit (A)</p> Signup and view all the answers

What implication does a mixed cost have on decision-making under resource limitations?

<p>It must be analyzed for fixed and variable portions (A)</p> Signup and view all the answers

Flashcards

Fixed Costs

Costs that remain constant in total, regardless of the activity level, within a specific range and timeframe.

Variable Costs

Costs that change in total in direct proportion to the level of activity.

Mixed Costs

Costs that have both fixed and variable components.

Cost-Volume-Profit (CVP) Analysis

A technique examining how changes in sales volume, costs, and prices affect profits.

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Break-Even Point

The level of activity where total revenues equal total costs resulting in zero profit.

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Contribution Margin Ratio

The percentage of revenue available to cover fixed costs and generate profit.

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Variable Costs

Costs that change proportionally with the level of production or activity.

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Fixed Costs

Costs that remain constant regardless of the level of production or activity.

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Mixed Costs

Costs that have both fixed and variable components.

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Relevant Range

The range of activity over which cost behavior is assumed to be valid.

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Break-Even Point

The level of activity where total revenue equals total costs, resulting in zero profit.

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Contribution Margin

Revenue minus variable costs.

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Break-Even Analysis

A method to determine the level of activity required to break even.

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Contribution Margin per Unit

Price per unit minus variable cost per unit.

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Break-Even Units

Fixed Costs divided by Contribution Margin per unit.

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Profit Target Units

Fixed Costs plus desired profit divided by contribution margin per unit.

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Contribution Margin Ratio

The contribution margin expressed as a percentage of revenue.

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CVP Analysis

A planning process and a decision-making tool that analyzes the relationship among costs, volume, and profit.

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Fixed Costs

Costs that remain constant over a given period or activity range.

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Variable Costs

Costs that change directly with the level of activity or output.

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Break-Even Point

The point where total revenue equals total costs, resulting in zero profit or loss.

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Sales Mix

The proportion of different products sold by a business.

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Linear Cost Behavior

The assumption that costs change in a straight line in relation to production volume.

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Study Notes

Contribution Margin Ratio

  • The contribution margin ratio is calculated by dividing the contribution margin by total sales.
  • The contribution margin is the difference between total sales and total variable costs.
  • In this case, the contribution margin is $150 - $90 = $60.
  • Therefore, the contribution margin ratio is $60 / $150 = 0.4 or 40%.

Assumptions of CVP Analysis

  • One assumption NOT part of cost-volume-profit analysis is that all costs are linear.
  • Costs are not always linear, and may have non-linear relationships with output.

Break-Even Data and Decision Making

  • Break-even data assists in decision-making by providing a clear understanding of the volume of sales needed to cover all costs.
  • This information can help businesses determine the feasibility of new projects, price products effectively, and make informed decisions about resource allocation.

Fixed Costs

  • Fixed costs are costs that do not change with the level of goods or services produced.
  • Examples include rent, salaries, and insurance.

Resource-Limited Decision Making

  • In resource-limited decision making, it is crucial to understand the contribution margin per unit of scarce resource (e.g., labor hours, machine time).

Assumptions of CVP Analysis

  • A key assumption underlying cost–volume–profit analysis is that the selling price per unit is constant.

Break-Even Analysis

  • A break-even analysis specifically calculates the point at which total revenues equal total costs.

Fixed Cost Definition

  • A fixed cost remains constant in total regardless of changes in activity levels within the relevant range.

Variable Costs

  • Variable costs are primarily influenced by the level of activity in a company.
  • Examples include direct materials, direct labor, and sales commissions.

Profitability Under Resource Limitations

  • Contribution margin per unit of scarce resource is the most critical factor in analyzing profitability under resource limitations.

Contribution Margin Ratio Impact

  • The contribution margin ratio assists in CVP calculations by calculating the proportion of each sales dollar that contributes to covering fixed costs and generating profit.

Mixed Costs

  • A true statement about mixed costs is that they have both a fixed and variable component.

Relevant Information in Decision Making

  • The aspect of sunk costs is usually less important when assessing relevant information for decision making.

Break-Even Analysis

  • Break-even analysis determines the sales volume needed to cover all fixed and variable costs.

Contribution Margin

  • Contribution margin represents the difference between sales revenue and variable costs.

Fixed Costs and the Relevant Range

  • When costs are classified as 'fixed', if the activity level exceeds the relevant range, the fixed cost may change.
  • Every cost has a relevant range where the cost is fixed, but if the activity level changes significantly, the cost may become variable or change in a different way.

Break-Even Point Formula

  • The formula for calculating the break-even point in units is Fixed Costs / (Selling Price per Unit - Variable Cost per Unit).

Desired Profit Calculation

  • The desired profit is added to the fixed costs in the unit formula for desired profit.

Break-Even Point and Variable Cost Changes

  • If variable costs increase while fixed costs remain constant, the break-even point will increase.
  • This means you will need to sell more units to cover your costs.

Contribution Margin Ratio

  • The contribution margin ratio is expressed as a percentage.

Mixed Cost Classification

  • The cost classification that changes when production volume changes significantly is mixed costs.
  • As production increases, a mixed cost can change from being mostly fixed to becoming mostly variable, as the variable component becomes more dominant.

Profitability

  • If total revenue exceeds total costs, the result is a profit.

Mixed Costs and Resource Limitations

  • A mixed cost has the implication that the contribution margin per unit of the scarce resource will change as the production volume increases or decreases.
  • This makes it more complex to analyze when making decisions with limited resources.

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Accounting: Cost-Volume-Profit Analysis (PDF)

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