Cost Volume Profit Analysis (24 marks)

How do fixed and variable costs behave within the relevant range?

Total fixed costs stay the same as activity changes. Variable cost per unit stays the same, so total variable costs rise with activity.

What is contribution margin, and how do I calculate it?

Money left after variable costs to cover fixed costs and profit.

CM per unit = selling price − variable cost per unit.

CM ratio = CM per unit ÷ selling price.

What is break-even, and how do I calculate it? (units and $)

The point where revenue equals total costs and profit is zero.

Units = fixed costs ÷ CM per unit.

Sales dollars = fixed costs ÷ CM ratio.

How do I calculate sales needed for target profit?

Units = (fixed costs + target profit) ÷ CM per unit.

Dollars = (fixed costs + target profit) ÷ CM ratio.

What is margin of safety?

How far sales can fall before a loss.

Safety = sales − break-even

Safety ratio (%) = cushion ÷ sales × 100

How do I calculate profit using contribution margin?

Profit = (units sold × CM per unit) − fixed costs.

Include variable selling and administration expenses when calculating contribution.

1. ___________ remain unchanged when activity level changes within the relevant range.

2. The excess of selling price over variable costs is called______________

3. Fixed manufacturing overhead is included in product costs under ______________

4. An activity level where total revenues equal total costs is termed _______________

5. Direct labour is an example of a ________________

6. _________________ measures the excess of sales over break-even sales volume.

1. Total fixed costs remain unchanged when activity level changes within the relevant range.

2. The excess of selling price over variable costs is called Contribution margin

3. Fixed manufacturing overhead is included in product costs under Absorption costing

4. An activity level where total revenues equal total costs is termed Break-even point

5. Direct labour is an example of a Variable cost

6. Margin of safety measures the excess of sales over break-even sales volume.

Direct materials used - formula

Direct materials used = Beginning raw materials + Purchases - End raw materials

Manufacturing overhead - formula

Total manufacturing overhead = Total factory costs

Total work in process - formula

Total manufacturing costs = Direct Materials used + Direct Labour + Overhead

Total Work in Process = Beginning Work in Process + Total Manufacturing costs

Cost of goods materials - formula

Cost of goods materials = Total work in process - Ending Work in Process

Contribution per unit - formula

Selling price − variable cost per unit

Contribution margin ratio

Contribution per unit ÷ selling price