Cost Volume Profit Analysis

Question 1

How can fixed costs be classified?

Answer 1

They remain constant/fixed when changes occur to the volume of activity

Question 2

How can variable costs be classified?

Answer 2

They vary according the volume of activity

Question 3

What does a graph of fixed cost against the volume of activity look like?

Answer 3

A straight horizontal line

x axis = volume of activity in units of output
(y axis = cost in pounds)

Question 4

What does the graph of rent cost against the volume of activity look like?

Answer 4

stairs from left to right (increasing) (_|-)

Question 5

What does the graph of variable cost against the volume of activity look like?

Answer 5

An upwards sloping straight line

Question 6

How do you calculate the break even point?

Answer 6

= fixed cost / (sales revenue per unit - variable costs per unit)

Question 7

How do you calculate the contribution margin ratio (CMR)?

Answer 7

Contribution/ sales revenue * 100%

Question 8

How do you calculate the target profit?

Answer 8

t = fixed cost + target profit / sales revenue per unit - variable cost per unit

t is the required no. of units of output to achieve the specific target profit

Question 9

What are the weaknesses of break even analysis?

Answer 9

3 general problems:

1) non linear relationships
2) stepped fixed costs
3) multi product businesses

Question 10

What is a semi variable cost with an example?

Answer 10

The cost has elements of both fixed and variable costs

Electricity cost in a hairdressers

heating and lighting is most likely fixed
power for hairdryers is most likely variable with volume

Question 11

What is total cost at zero activity?

Answer 11

= the fixed cost

Question 12

What is the profit/loss?

Answer 12

the diff. between sales revenue and total cost = the vertical distance between the total sales revenue line and the total cost line at a specific volume of activity

Question 13

When is the volume of activity at break even point (BEP)?

Answer 13

when there is NO distance between the total sales revenue line and the total cost line

Question 14

What happens when the volume of activity < BEP?

Answer 14

A loss will be incurred as total costs > total revenue

Question 15

What happens when the volume of activity > BEP?

Answer 15

There’s a profit because total revenue > total cost

Question 16

What is the high-low method?

Answer 16

it involves taking the highest and lowest total electricity figures for example from the range of past quarterly data available and then assume the difference is caused entirely by variable costs

Question 17

What is a weakness of the high low approach?

Answer 17

it relies on 2 points only in a range of information relating to quarterly charges

it ignores ALL other information

Question 18

In break even analysis what is the total cost at zero activity?

Answer 18

the amount of the fixed cost

Question 19

Is there zero sales revenue when there is zero volume of activity?

Answer 19

YES

Question 20

How to calculate profit?

Answer 20

total sales revenue - total cost

Question 21

What is the break even point?

Answer 21

when total sales revenue = total cost

Question 22

In break even analysis, when is a loss incurred?

Answer 22

when the volume of activity is below the BEP

• because total costs exceeds total revenue

Question 23

How to calculate the number of unit.s of output at BEP , b?

Answer 23

b = fixed cost / sales revenue per unit - variable cost per unit

Question 24

What is contribution per unit?

Answer 24

sales revenue per unit - variable cost per unit

Question 25

What is the margin of safety?

Answer 25

the extent at which the planned volume of output/sales lies above the break even point

Question 26

what can the margin of safety be used as?

Answer 26

a partial measure of risk

Question 27

What is operating gearing?

Answer 27

the relationship between contribution and fixed cost

Question 28

When is an activity said to have high operational gearing?

Answer 28

when an activity has a relatively high fixed cost in comparison to the total variable cost (at its normal level of activity)

Question 29

Which costs are only considered for marginal analysis?

Answer 29

only costs and revenues that vary with decision

usually fixed costs can be ignored

Question 30

What are the 4 main areas that marginal analysis can be used for decision making?

Answer 30

1) pricing / assessinh opportunities to enter contracts
2) determining the most efficient use of scarce resources
3) make-or-buy decisions
4) closing or continuation decisions

Question 31

What is the marginal cost?

Answer 31

the minimum price at which the business can offer a product or service for sale

Question 32

When is a marginal cost approach used?

Answer 32

when the opportunity to sell at a price to cover the full cost is not available

Question 33

What is the guiding principle for managers making decisions relating to the use of scarce resources?

Answer 33

the most profitable combination of products will occur when the contribution per unit of the scarce factor is maximised

Question 34

what is outsourcing?

Answer 34

obtaining services or products from a sub-contractor

Question 35

How are make-or -buy decisions made?

Answer 35

take the action that leads to the highest total contribution

Question 36

how should closing/continuing activities be assessed?

Answer 36

by the net effect on total contributions