MA 2

Question 1

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

Answer 1

A technique to examine the relationships among:

• total sales volume
• total costs
• total revenues
• profits

for a given time period.

Question 2

What are the CVP assumptions?

Answer 2

Cost-Volume-Profit

1. All costs are classified as fixed or variable.
2. Total cost and revenue functions are linear within the relevant range.
3. Analysis is for a single product or a constant sales mix.
4. One activity cost driver: unit or dollar sales volume.

Question 3

What is the formula for profit?

Answer 3

Profit (π) = Total Revenues (R) - Total Costs (Y)
- Revenues (R): R = pX (price × sales volume)
- Total Costs (Y): Y = a + bX (fixed + variable costs)

Question 4

What is the expanded profit formula?

(with variables)

Answer 4

π = pX - (a + bX)

Question 5

How to find the break-even point (units)?

Answer 5

Break-even units = Fixed costs / Unit contribution margin

Question 6

What is Contribution Margin?

Answer 6

• Contribution Margin = Sales Revenue - Variable Costs
• Contribution Margin Ratio = (Sales Price - Variable Costs per unit) / Sales Price

Question 7

What is Margin of Safety?

Answer 7

Margin of Safety = Budgeted Sales - Break-Even Sales
Indicates the risk of operating below break-even.

Question 8

What is Operating Leverage?

Answer 8

• A measure of the extent that an organisation’s costs are fixed
• Degree of Operating Leverage = Contribution Margin / Income Before Taxes

Question 9

How to determine sales for a target profit?

Answer 9

Target units = (Fixed costs + Desired profit) / Unit contribution margin

Question 10

Impact of Income Taxes on Target Profit?

Answer 10

To account for taxes:

• Required Before-Tax Profit = After-Tax Profit / (1 - Tax Rate)
• Substitute this into the profit formula.