Unit 4

Question 1

Cost-volume-profit analysis

Answer 1

a vital tool that managers within a company can use for decision making by focusing on the interaction between elements

Question 2

Elements in CVP

Answer 2

1 Selling prices
2 Volume or level of activity
3 Unit variable costs
4 Total fixed costs
5 Mix of products sold

Question 3

Assumptions in CVP

Answer 3

1. Selling price is constant throughout the entire relevant range.
2. Costs are linear throughout the entire relevant range.
3. In multi-product companies, the sales mix is constant.
4. In manufacturing companies, inventories do not change
   (units produced = units sold).

Question 4

Contribution margin

Answer 4

the amount remaining from revenue after variable expenses have been deducted, the amount available to cover fixed expenses, and provide profits for the period

Revenue - Variable costs = Contribution Margin - Fixed Costs = Profit

Question 5

How does changes in activity affect contribution margin and profit

Answer 5

if revenue are zero, the company’s loss would equal its fixed expenses.
Each unit that is sold reduces the loss by the amount of the unit contribution margin.
Once the break-even point has been reached, each additional unit sold increases the company’s profit by the amount of the unit contribution margin

Question 6

Change in variable cost, fixed cost and sales volume

Answer 6

An increase/decrease in fixed cost will not affect the contribution

An increase/decrease in the variable cost of a product would in turn increase/decrease the contribution with the same value.

Question 7

break-even point

Answer 7

the level of revenue at which the company’s profit is zero which can be computed using either the equation method or the contribution margin method

Question 8

Steps to prepared a CVP graph

Answer 8

1. Draw a line parallel to the volume axis to represent total fixed expenses.
2. Choose some volume of sales and plot the point representing total expenses (fixed and variable) at the activity level you have selected.
3. Choose some volume of sales and plot the point representing total revenue pounds at the activity level you have selected.

Question 9

Target profit analysis

Answer 9

Using CVP formulas to determine the sales volume needed to achieve a target profit

Question 10

margin of safety

Answer 10

the excess of budgeted (or actual) revenue over the break-even revenue

the amount by which revenue can drop before losses begin to be incurred.

Question 11

Operating Leverage

Answer 11

A measure of how sensitive net profit is to percentage changes in sales.

With high leverage, a small percentage increase in sales can produce a much larger percentage increase in net profit.

Question 12

sales mix

Answer 12

the relative proportions in which a company’s products are sold

Question 13

margin of safety will increase

Answer 13

If sales volume increases and all other factors remain constant