Chapter 5

Question 1

What are the four costs used in CVP analysis?

Answer 1

Fixed Costs
Variable Costs
Sunk Costs
Opportunity Costs

Question 2

What is the CVP formula?

Answer 2

Profit = SPx - VCx - FC

Question 3

What is the CVP formula mainly used for?

Answer 3

Pricing products and evaluating the effect of strategies on profit.

Question 4

What is the break-even point?

Answer 4

The level or production which total sales is equal to total costs.

Question 5

Define the contribution margin.

Answer 5

The contribution each sold unit makes towards the total fixed costs. The difference between selling price and variable costs.

Question 6

What is the contribution margin formula?

Answer 6

CM per unit = Selling price per unit - Variable costs per unit. e.g. Total CM = SPx - VCx

Question 7

What is a margin of safety?

Answer 7

The amount by which expected sales are greater than the break-even point. This can be shown as percentage of total sales before the business incurs a loss.

Question 8

What is the formula for margin of safety?

Answer 8

MOS = Actual or budgeted sales - break even sales

Question 9

What is a sunk cost?

Answer 9

A cost that the business has already incurred and it will not be changed, irrespective of the alternatives chosen. e.g. depreciation of a factory or payment for inventory already purchased.

Question 10

What is an opportunity cost?

Answer 10

Benefits lost when another alternative is chosen.

Question 11

Name five qualitative factors involved in differential analysis.

Answer 11

Customers
Employees
Competitors
Legal Constraints/Government
Suppliers