Cost-Volume-Profit Analysis Q&A
Accounting Q&A · Cost and Management Accounting · Topic 13
Work through the questions, then reveal the answers to check your reasoning.
25 short-answer questions. Try each question before revealing its answer.
Worked example
A product sells for 50 with variable cost of 30. With fixed costs of 24,000, break-even is 1,200 units. Selling 1,500 units produces 6,000 of operating profit.
Core concepts
1. What does CVP analysis examine?
How changes in price, cost, volume and sales mix affect operating profit.
2. What is contribution per unit?
Selling price less variable cost per unit.
3. What is the contribution margin ratio?
Contribution divided by sales.
4. What is break-even?
The point where total contribution equals fixed costs and operating profit is zero.
5. How do you calculate break-even units?
Divide fixed costs by contribution per unit.
6. How do you calculate break-even sales value?
Divide fixed costs by the contribution margin ratio.
7. What is the target-profit units formula?
Divide fixed costs plus target operating profit by contribution per unit.
8. What is margin of safety?
Expected or actual sales above break-even sales.
9. How do you calculate margin of safety percentage?
Divide the margin of safety by actual or planned sales, using the same units.
10. What is a relevant range in CVP?
An activity band in which the cost and price assumptions remain reasonable.
Worked applications
11. Price is 40 and variable cost is 25. What is unit contribution?
15.
12. What is the contribution margin ratio at that price?
37.5%.
13. Fixed costs are 18,000. How many units break even at 15 contribution?
1,200.
14. What is break-even revenue at a 37.5% contribution ratio?
48,000.
15. How many units earn target profit of 9,000?
1,800 when fixed costs are 18,000 and contribution is 15 per unit.
16. At planned sales of 2,000 units, what is the unit margin of safety?
800 units above break-even sales of 1,200.
17. What is the margin of safety percentage in that example?
40%.
18. What is operating profit at 2,000 units and 15 contribution, with fixed costs of 18,000?
12,000.
19. What happens if unit contribution is zero and fixed costs are positive?
There is no finite break-even sales volume under the model.
Review and exam practice
20. What is a sales mix?
The relative proportions of products sold.
21. Why does a change in sales mix affect break-even?
It changes weighted contribution per unit or bundle.
22. One bundle contains two items contributing 8 each and one item contributing 14. What is bundle contribution?
30.
23. With 9,000 fixed costs, how many such bundles break even?
300 bundles under a constant mix.
24. What can invalidate a simple CVP forecast?
Capacity steps, discounting, changing product mix and non-linear costs.
25. What should a CVP recommendation show?
State assumptions, break-even, sensitivity to changes and the risk if sales fall.
