CVP Analysis

Question 1

What is Cost-Volume-Profit (CVP) analysis?

Answer 1

CVP analysis is a decision-making tool that shows how changes in cost and volume affect a company’s operating profit. Example: A bakery uses CVP to find out how many cakes it must sell to break even.

Question 2

What is the formula for the Contribution Margin (CM)?

Answer 2

CM = Selling Price per Unit - Variable Cost per Unit. Example: If a T-shirt sells for $25 and costs $10 to make, CM = $15.

Question 3

What is the formula for the Contribution Margin Ratio?

Answer 3

CM Ratio = (Contribution Margin / Selling Price) × 100. Example: $15 CM on $25 price → 60%.

Question 4

What is the Break-even point (units)?

Answer 4

Break-even units = Fixed Costs / Contribution Margin per Unit. Example: $12,000 / $15 = 800 units.

Question 5

What is the Break-even point (sales revenue)?

Answer 5

Break-even sales = Fixed Costs / CM Ratio. Example: $12,000 / 0.6 = $20,000.

Question 6

What is the formula for Target Profit (units)?

Answer 6

Target units = (Fixed Costs + Target Profit) / CM per Unit. Example: ($12,000 + $3,000) / $15 = 1,000 units.

Question 7

What is the formula for Target Profit (sales revenue)?

Answer 7

Target sales = (Fixed Costs + Target Profit) / CM Ratio. Example: ($12,000 + $3,000) / 0.6 = $25,000.

Question 8

Define Margin of Safety.

Answer 8

Margin of Safety = Actual Sales - Break-even Sales. Example: Sales = $30,000, BE = $20,000 → MoS = $10,000.

Question 9

What is the Margin of Safety %?

Answer 9

MoS % = (Margin of Safety / Actual Sales) × 100. Example: $10,000 / $30,000 × 100 = 33.33%.

Question 10

What is the main assumption of CVP analysis?

Answer 10

Costs can be clearly divided into fixed and variable; sales price and variable cost per unit stay constant. Example: A restaurant assumes fixed rent and stable food costs.

Question 11

List 3 limitations of CVP analysis.

Answer 11

1) Assumes linear cost behavior, 2) Fixed costs may change, 3) Ignores changes in market conditions. Example: A seasonal business may not fit CVP assumptions.

Question 12

What is meant by fixed costs?

Answer 12

Fixed costs stay constant regardless of output. Example: Factory rent stays $5,000 whether 10 or 1,000 items are produced.

Question 13

What are variable costs?

Answer 13

Costs that vary directly with output. Example: Materials for each shirt produced.

Question 14

Give an example of a semi-variable cost.

Answer 14

Cost with both fixed and variable parts. Example: Phone bill with a base fee and per-minute charge.

Question 15

What happens to the break-even point if fixed costs increase?

Answer 15

Break-even units increase. Example: Higher rent = more units needed to cover costs.

Question 16

What happens to the break-even point if selling price increases?

Answer 16

Break-even units decrease. Example: Charging more per item covers fixed costs faster.

Question 17

What is the effect of reducing variable cost per unit?

Answer 17

Increases contribution margin and reduces break-even point. Example: Finding cheaper suppliers.

Question 18

What is operating leverage?

Answer 18

A measure of how sensitive profit is to changes in sales volume. Example: High fixed costs = high leverage.

Question 19

Why is CVP useful in decision-making?

Answer 19

Helps managers forecast profits, set prices, and make output decisions. Example: A startup evaluates break-even before launching.

Question 20

How does CVP analysis aid pricing decisions?

Answer 20

It shows the minimum sales price to cover costs and earn profit. Example: A coffee shop sets prices based on desired margin.

Question 21

Can CVP be used for multi-product companies?

Answer 21

Yes, using weighted average contribution margin. Example: A bakery selling bread and cookies calculates blended CM.

Question 22

What is a product mix in CVP?

Answer 22

The ratio of different products sold. Example: 60% T-shirts, 40% hoodies.

Question 23

How does change in product mix affect CVP?

Answer 23

Changes CM and affects break-even point. Example: Selling more high-margin items lowers BEP.

Question 24

What happens to margin of safety if sales fall?

Answer 24

MoS decreases, increasing business risk. Example: MoS shrinks if a retailer faces demand drop.

Question 25

Can CVP handle step-fixed costs?

Answer 25

Not well. Step-fixed costs break the linearity assumption. Example: Adding a new machine increases fixed costs.

Question 26

How can CVP be applied in a service business?

Answer 26

By treating service hours as units. Example: A law firm calculates BEP in billable hours.

Question 27

What is break-even analysis used for?

Answer 27

To determine sales needed to cover costs. Example: A food truck estimates required monthly revenue.

Question 28

How can sensitivity analysis improve CVP?

Answer 28

Tests impact of changes in cost/price assumptions. Example: A business sees how a 5% cost rise affects profit.

Question 29

How does inflation affect CVP assumptions?

Answer 29

Costs and prices may no longer stay constant. Example: Rising wages increase variable costs.

Question 30

What is the angle of incidence in a CVP graph?

Answer 30

Shows profit sensitivity to sales. Steeper angle = higher contribution margin. Example: Steep slope = high profit per unit.

Question 31

What is the significance of the CVP graph?

Answer 31

Visualizes cost, revenue, and profit relationships. Example: Helps managers spot BEP and MoS easily.

Question 32

When is CVP not suitable?

Answer 32

For complex operations with non-linear costs or unpredictable demand. Example: A tech firm with high R&D variability.

Question 33

Explain high and low operating leverage.

Answer 33

High leverage: high fixed costs = big profit swings. Low leverage: variable cost heavy = more stable. Example: Airlines vs. retailers.

Question 34

Why is CM more useful than gross profit in CVP?

Answer 34

CM links directly to cost behavior and decision-making. Example: CM helps assess pricing impact faster than gross profit.

Question 35

What is the effect of automation on CVP?

Answer 35

Increases fixed costs and CM per unit, making break-even higher but profit grow faster beyond BEP. Example: A factory installs robots.

Question 36

Explain breakeven analysis in the context of nonprofit organizations.

Answer 36

They use CVP to cover costs, not profit. Example: A charity event calculates ticket sales to cover venue and food costs.

Question 37

What does a zero margin of safety mean?

Answer 37

Business is exactly at break-even — any sales drop causes a loss. Example: A startup with just enough sales to cover rent.

Question 38

What is the break-even point if selling price is $50, variable cost is $30, and fixed cost is $10,000?

Answer 38

BEP = $10,000 / ($50 - $30) = 500 units. Example: 500 units must be sold to break even.

Question 39

If CM ratio is 40%, fixed costs are $8,000, what is the break-even revenue?

Answer 39

BEP = $8,000 / 0.4 = $20,000. Example: Sales of $20,000 needed to break even.