CVP analysis

Question 1

what is cost-volume analysis (CVP)

Answer 1

CVP analysis helps managers understand the interrelationship between cost, volume and profit in an organisation by focusing on interactions between five variables:
- prices of products
- volume or level of activity
- per unit variable costs
- total fixed costs
- mix of products sold

Question 2

what is the contribution margin (CM)?

Answer 2

amount remaining from sales revenue after variable expenses have been deducted

• CM goes to cover fixed expenses
• after covering fixed costs, any remaining CM contributes to profit

Question 3

what is the contribution approach?

Answer 3

for each additional unit, more in contribution margin will help to cover fixed expenses and profit

Question 4

what is the break-even point defined as through the contribution approach?

Answer 4

• the point where total sales revenue equals total expenses (variable and fixed)
• the point where total contribution margin equals total fixed expenses

Question 5

what is the contribution margin ratio?

Answer 5

CM ratio = contribution margin/sales

Question 6

what is the contribution margin method (how do you work out break-even points)?

Answer 6

a variation of the equation method

break-even point in units sold = fixed expenses/unit contribution margin

break-even point in total sales = fixed expenses/CM ratio

Question 7

what can CVP formula be used for?

Answer 7

to determine sales volume needed to achieve a target net profit figure

Question 8

what is the equation for sales?

Answer 8

sales = variable expenses + fixed expenses + profits

Question 9

how do you work out the units sold to attain the target profit?

Answer 9

fixed expenses + target profit/ unit contribution margin

Question 10

what is the margin of safety?

Answer 10

excess of budgeted (or actual) sales over the break-even volume of sales. The amount by which sales can drop before losses begin to be incurred.

margin of safety = total sales - break-even sales