📘 TOPIC 10: Costing and CVP Analysis

Question 1

What is the formula for Contribution Margin (CM)?

Answer 1

CM = Sales Revenue – Variable Costs

Contribution Margin represents the portion of sales revenue that exceeds total variable costs.

Question 2

How is CM per unit calculated?

Answer 2

CM per unit = Selling Price – Variable Cost per unit

This calculation helps determine how much each unit contributes to fixed costs and profit.

Question 3

What is the Contribution Margin Ratio?

Answer 3

Contribution Margin Ratio = CM / Sales Revenue × 100

This ratio indicates the percentage of each sales dollar that contributes to covering fixed costs and profit.

Question 4

How do you calculate Break-even Units?

Answer 4

Break-even Units = Fixed Costs / CM per unit

This formula helps determine the number of units that must be sold to cover all fixed costs.

Question 5

What is the formula for Break-even Revenue?

Answer 5

Break-even Revenue = Break-even Units × Price per Unit

This calculation gives the total revenue needed to cover fixed costs.

Question 6

How do you determine Target Profit Units?

Answer 6

Target Profit Units = (Fixed Costs + Desired Profit) / CM per unit

This formula helps calculate how many units must be sold to achieve a specific profit.

Question 7

What does Margin of Safety (Units) measure?

Answer 7

Margin of Safety (Units) = Actual or Forecasted Units – Break-even Units

This metric indicates how much sales can drop before reaching the break-even point.

Question 8

How is Margin of Safety (Revenue) calculated?

Answer 8

Margin of Safety (Revenue) = Actual or Forecasted Sales – Break-even Sales

This calculation shows the excess of actual or projected sales over the break-even sales.