Cost-volume-profit Analysis Chap 8

Question 1

Break-even points

Answer 1

The level at which neither a profit or a loss will occur

Question 2

Cost-volume-profit CVP analysis

Answer 2

Is based on the relationship between volume and sales revenue, costs and profit in the short run

Question 3

Contribution margin

Answer 3

Sales revenue minus variable costs

Question 4

Margin of safety

Answer 4

How much sales decrease before a loss occur

Question 5

Contribution graph

Answer 5

Has the advantage that it emphasises the total contribution, which is represented by the difference between total sales revenue line and the total variable cost line

Question 6

Profit-volume graph

Answer 6

Shows the impact of changes in volume on profit alone

Question 7

Operating leverage

Answer 7

A measure of the sensitivity of profits to changes in sales
-> the greater the degree of operating leverage, the more changes in sales activity will affect profit

Question 8

CVP analysis assumptions and limitations

Answer 8

1. All other variables remain constant
2. A single product or constant sales mix
3. Total costs and total revenue are linear functions of output
4. Profits are calculated on a variable costing basis
5. Costs can be accurately divided into their fixed and variable elements
6. The analysis applies only to the relèvent range
7. The analysis applies only to a short-term time horizon