FFMA Week 9 Flashcards
(FFMA-230) What is the main objective of Cost-Volume-Profit (CVP) analysis?
The objective of CVP analysis is to establish what will happen to the financial results when the level of activity or volume fluctuates.
(FFMA-231) How is contribution defined in CVP analysis?
Contribution in CVP analysis is defined as selling income minus variable costs.
(FFMA-232) Why are fixed costs considered constant in CVP analysis?
Fixed costs are considered constant in CVP analysis because they are incurred regardless of business activity and remain the same within the relevant range.
(FFMA-233) What are the applications of CVP analysis?
Applications of CVP analysis include deciding whether to accept a special order, abandoning a line of business, determining the best use of a limiting factor, and deciding between making in-house or buying from a contractor.
(FFMA-234) How does CVP analysis help in accepting a special order?
CVP analysis helps in accepting a special order by determining if the sales price covers the variable costs and contributes towards fixed costs, ensuring no better alternative use of capacity.
(FFMA-235) When should a business continue a line of business according to CVP analysis?
A business should continue a line of business in the short term if it makes a contribution to fixed costs, as shown by CVP analysis.
(FFMA-236) What is a limiting factor in the context of CVP analysis?
A limiting factor in CVP analysis refers to a constraint like limited raw materials or skilled labor that restricts the business’s ability to produce or sell products.
(FFMA-237) What assumptions does CVP analysis rely on?
Assumptions of CVP analysis include constant variables, single or constant sales mix, linear total costs and revenues, variable costing basis for profit calculations, and applicability only within a relevant range of activity.
(FFMA-238) Why does CVP analysis apply only to a short-term horizon?
CVP analysis applies only to a short-term horizon because it assumes fixed costs remain constant, which is typically only true in the short term.
(FFMA-239) What is the next recommended step after understanding the concept of CVP analysis?
The next recommended step is to watch the video “Cost-Volume-Profit Analysis 1.2” for further learning on the topic.
(FFMA-240) What is the contribution per unit in the provided example?
The contribution per unit is £200 (sales income of £500 minus variable expenses of £300).
(FFMA-241) How is the total contribution margin calculated in the example?
The total contribution margin is calculated as £100,000, derived from the total income (£250,000 from selling 500 bikes at £500 each) minus total variable expenses (£150,000 for 500 bikes at £300 each).
(FFMA-242) What does the contribution margin indicate in CVP analysis?
In CVP analysis, the contribution margin indicates the amount remaining from sales revenue after deducting variable expenses, which goes towards covering fixed expenses and contributing to net income.
(FFMA-243) How does selling an additional unit impact net income once fixed costs are covered?
Selling an additional unit increases the contribution by £200 per unit, directly contributing to an increase in net income once fixed costs are covered.
(FFMA-244) What is the significance of covering fixed costs in CVP analysis?
Covering fixed costs is significant in CVP analysis because once they are covered, any additional contribution margin directly contributes to net income or profit.
