Cost-Volume-Profit Profit analysis

Cost-Volume-Profit analyses consider how costs and profits change with change in the volume or Activity level. Cost-volume-profit profit (CVP) analysis is a technique that examines changes in profits in response to changes in sales volumes, costs, and prices. Accountants often perform CVP analysis to plan future levels of operating activity and provide information about: _ Which products or services to emphasize _ The volume of sales needed to achieve a targeted level of profit _ The amount of revenue required to avoid losses _ Whether to increase fixed costs _ How much to budget for discretionary expenditures _ Whether fixed costs expose the organization to an unaccept unacceptable level of risk

Break Even
The break-even point (BEP) is the point at which cost or expenses and revenue are equal: there is no net loss or gain, and one has "broken even".

Break Even Point

Fixed cost Contribution per Unit

Break Even Revenue

Fixed Cost C/S Ratio

Contribution
Sales variable Cost Or Sales * C/S Ratio

C/S Ratio
Contribution x 100 Sales

Prepared by: Mohammad Faizan Farooq Qadri Attari ACCA (Finalist)

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Margin of Safety
Margin of safety represents the strength of the business. It enables a business to know what is the exact amount it has gained or lost and whether they are over or below the break even point

Margin of Safety in Units = Budgeted sales in Units Break Even Point Margin of Safety in $ Margin of Safety in % = Budgeted sales in $ Break Even Revenue = Budgeted sales in Units Break Even Point
Budgeted sales in Units x 100

Margin of Safety in %

= Budgeted sales in $ Break Even Revenue x 100

Budgeted Sales in $

Actual Sales / Targeted Profit (Units)

Fixed cost + Profit required Contribution per Unit

($)
Fixed Cost + Profit Required C/S Ratio

Question # FFQA1

The shaded area on the conventional breakeven chart shown above represents A loss. B fixed cost. C variable cost. D profit.

Prepared by: Mohammad Faizan Farooq Qadri Attari ACCA (Finalist)

http://www.ffqacca.co.cc

Contact: faizanacca@yahoo.com

Question # FFQA2
W Ltd makes leather purses. It has drawn up the following budget for its next financial period: Selling price per unit $11.60 Variable production cost per unit $3.40 Sales commission 5% of selling price Fixed production costs $430,500 Fixed selling and administration costs $198,150 Sales 90,000 units The margin of safety represents A 5.6% of budgeted sales. B 8.3% of budgeted sales. C 11.6% of budgeted sales. D 14.8% of budgeted sales.

Question # FFQA2 Contd

The marketing manager has indicated that an increase in the selling price to $12.25 per unit would not affect the number of units sold, provided that the sales commission is increased to 8% of the selling price. These changes will cause the breakeven point (to the nearest whole number) to be A 71,033 units. B 76,016 units. C 79,879 units. D 87,070 units.

Question # FFQA3

The company expects to sell h units in the next accounting period. The margin of safety is shown on the diagram by Ak Bm Cn Dp

Prepared by: Mohammad Faizan Farooq Qadri Attari ACCA (Finalist)

http://www.ffqacca.co.cc

Contact: faizanacca@yahoo.com

Question # FFQA4

What is the margin of safety at the 1,700 units level of activity? A 200 units B 300 units C 500 units D 1,025 units

Question # FFQA5
A company manufactures a single product which it sells for $20 per unit. The product has a contribution to sales ratio of 40%. The companys weekly break- even point is sales revenue of $18,000. What would be the profit in a week when 1,200 units are sold? A $1,200 B $2,400 C $3,600 D $6,000

Question # FFQA6
A company has established a budgeted sales revenue for the forthcoming period of 500,000 with an associated contribution of 275,000. Fixed production costs are 137,500 and fixed selling costs are 27,500. What is the breakeven sales revenue? A 75,625 B 90,750 C 250,000 D 300,000

Prepared by: Mohammad Faizan Farooq Qadri Attari ACCA (Finalist)

http://www.ffqacca.co.cc

Contact: faizanacca@yahoo.com

Question # FFQA7
A company has the following budgeted information for the coming month: Budgeted sales revenue 500,000 Budgeted contribution 200,000 Budgeted profit 50,000 What is the budgeted break-even sales revenue? A 125,000 B 350,000 C 375,000 D 450,000

Question # FFQA8
An organisation manufactures and sells a single product. At the budgeted level of output of 2,400 units per week, the unit cost and selling price structure is as follows: per unit per unit Selling price 60 Less variable production cost 15 Less other variable cost 1 5 Less fixed cost 30 (50) Profit 10 What is the breakeven point (in units per week)? A 1,200 B 1,600 C 1,800 D 2,400

Question # FFQA9
A company manufactures one product which it sells for 40 per unit. The product has a contribution to sales ratio of 40%. Monthly total fixed costs are 60,000. At the planned level of activity for next month, the company has a margin of safety of 64,000 expressed in terms of sales value. What is the planned activity level (in units) for next month? A 3,100 B 4,100 C 5,350 D 7,750

Prepared by: Mohammad Faizan Farooq Qadri Attari ACCA (Finalist)

http://www.ffqacca.co.cc

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Question # FFQA10

Which line represents total variable cost? A Line A B Line B C Line C D Line D

Question # FFQA11
TP Ltd is now planning for 2009/2010. The budgeted demand is expected to be 20,000 services. Because of changes in technology, Material X and Material Y will be replaced by a new component that will cover both of their functions. Labour costs, variable overhead costs and fixed overhead costs are expected to remain at the same level as the previous year. The new component will cost 1440 per service. TP Ltd will keep the standard service charge at 135 for each computer. Required: The breakeven output for next year will be _________ If the fixed costs were to increase to 650,000, the sales revenue required in order to achieve a profit of 673,000 next year will be __________

Prepared by: Mohammad Faizan Farooq Qadri Attari ACCA (Finalist)

http://www.ffqacca.co.cc

Contact: faizanacca@yahoo.com

Question # FFQA12
FF manufactures various products and uses CVP analysis to establish the minimum level of production to ensure profitability. Fixed costs of 50,000 have been allocated to a specific product but are expected to increase to 100,000 once production exceeds 30,000 units, as a new factory will need to be rented in order to produce the extra units. Variable costs per unit are stable at 5 per unit over all levels of activity. Revenue from this product will be 750 per unit. Required: (a) Formulate the equations for the total cost at: (i) less than or equal to 30,000 units; (ii) more than 30,000 units. (b) Prepare a breakeven chart and clearly identify the breakeven point or points. (6 marks)

Prepared by: Mohammad Faizan Farooq Qadri Attari ACCA (Finalist)

http://www.ffqacca.co.cc

Contact: faizanacca@yahoo.com