Cost Volume Profit Analysis Flashcards
What is CVP used for?
They are looking for the number of units that need to be sold to cover both the cost of manufacturing and any fixed costs.
What is the break-even point?
This is the point where a business makes no profit or loss.
What is the contribution?
The amount after covering variable costs that “contribute” to fixed costs and making a profit. I.e. Sales - variable costs.
How to calculate the break-even point in units?
Total fixed costs/ contribution per unit.
Other ways to find profit?
Contribution - Fixed costs.
What is the margin of safety?
The difference between the budgeted sales and the break-even point.
How to calculate the margin of safety?
Budgeted sales - BEP sales
How to calculate the break-even point in revenue?
Total fixed costs / (C/S ratio)
How to calculate sales volume to achieve target profit?
(Fixed costs + Target profit) / contribution per unit
How to calculate C/S ratio?
Contribution/ selling price.
Why is CVP useful?
1) Helps in the planning process
2) Can help calculate the impact of changing the selling price, variable cost or fixed costs.
Why is CVP not useful?
1) Fixed costs are assumed to remain unchanged which is unrealistic.
2) Variable costs per unit are assumed to remain the same for all levels of production.
3) The selling price per unit is assumed to be the same.
