basics cvp analysis

Question 1

what is cvp?

Answer 1

the study of the effects of changes of csots and volume on a company;s profits

• it is a critical factor in managemet decisions
• it is important in profit planning

Question 2

cvp analysis considers the interrelationships among 5 components, what are they

Answer 2

1. columen or level of activity
2. unit selling prices
3. variable cost per unit
4. total fixed costs
5. sales mix

Question 3

what are the 5 underlying assumptions for CVP?

Answer 3

1. behaviour of both costs and revenue is linear throughout the relevant range of activity index
2. all costs can be classified as either variable or fixed with reasonable accuracy
3. changes in activity are the only factors that affect costs
4. inventory levels remain constant - all units produced are sold
5. when more than one type of product is sold, the sales mix will remain constant

Question 4

describe the cvp incoem statement

Answer 4

1. a statement for internal use
2. Classifies costs and expenses as fixed or variable
3. reports contribution margin in the body of the statement
4. reports the same incoem as a tradtional incom statemetn

Question 5

what is the formula for Contribution margin

Answer 5

unit selling prices - unit variable cost = CM

Question 6

what is the formula for the contribution margin ratio

Answer 6

Cm per unit / unit selling price

Question 7

what is the formula for breakeven

Answer 7

What is the breakeven point?

Question 8

What is CVP important for?

Answer 8

1. profit planning
2. Management decisions like
   a) setting selling price
   b) determining product mix
   c) maximizing the use of production facilities

Question 9

Will net income differ when using a CVP Income statement?

Answer 9

no, it will be the same as the regular income statement

Question 10

What are the differences between a CVP income statement and a regular one?

Answer 10

1. CVP income statement classifies costs as fixed or variable
2. CVP I.s. shows a contribution margin
3. CVP I.S usually shows a total and per unit amount to help with CVP analysis