Learning Unit 3 - Cost Volume (CVP) Relationships

Question 1

What is cost-volume-profit (CVP) analysis? (POMA Pg 78)

Answer 1

The interrelationship between activity levels, costs and an organization’s profits.

Question 2

What are the two main models for conducting CVP analysis?

Answer 2

1. Economist’s model
2. Accountant’s model

Question 3

What is sensitivity analysis?

Answer 3

Indicates how sensitive one variable is to the changes in another variable in the same model.

Question 4

Write the profit formula.

hint:
P = profit
SP = Selling price
X = number of units sold
FC = Fixed cost
VC = variable costs per unit

Answer 4

P = SPx - (Fc - VCx)

Question 5

What is margin of safety?

Answer 5

Margin of safety is a measure if the extent to which the current (or expected) level of sales can drop before a loss is incurred.

Question 6

What is the contribution margin?

Answer 6

The amount of sales revenue that is left after all variable costs (also variable period costs) have been subtracted.

Question 7

How do you calculate contribution?

Answer 7

Total contribution = total sales revenue - total variable expense.