# The term marginal cost refers to the additional costs incurred in providing a unit of

Save this PDF as:

Size: px
Start display at page:

Download "The term marginal cost refers to the additional costs incurred in providing a unit of"

## Transcription

1 Chapter 4 Solutions Question 4.1 A) Explain the following The term marginal cost refers to the additional costs incurred in providing a unit of product or service. The term contribution refers to the amount that a product or service contributes towards covering fixed costs. It is simply sales value less variable costs. A fixed cost is a cost that is unaffected by fluctuations in the level of activity (within a relevant range). B) Marginal format Marginal Statement Sales 4,300,000 Variable costs Direct material 1,250,000 Direct labour 760,000 Variable overhead 95,000 Variable sales expenses 75,000 2,180,000 CONTRIBUTION 2,120,000 Fixed costs Fixed overhead 1,165,000 Fixed sales expenses 450,000 Fixed administration 550,000 2,165,000 NET LOSS (45,000)

2 Solution 4.2 a) Profit Statement (showing apportionment of overheads) b) Profit Statement (marginal principles) c) Effect of closing Dept. 2 Overall the company would reduce profit by 198,000 by closing department 2 ( 1,004,000 before closure to 806,000). This can be explained by the lost contribution of 248,000 and only savings of 150,000 in overheads. I would advise management not to close department 2.

3 Question 4.3 Explain the following terms The break-even point is the point at which neither a profit or a loss is incurred. Breakeven occurs where total contribution is exactly equal to fixed cost and hence sales revenue is exactly equal to variable cost plus fixed cost. The break-even volume can be found by dividing the total fixed costs involved by the contribution per unit. The break-even revenue is found by multiplying the break-even volume by the sales price. The margin of safety is the amount of sales the business can afford to lose and still not make a loss. It is the difference between the budgeted sales volume (or revenue) and the budgeted break-even volume (or revenue). It can be expressed in units / products or sales or as a percentage. The contribution margin is another name for the contribution to sales ratio or C/S ratio. Contribution margin is simply the contribution divided by sales, multiplied by 100. If a C/S ratio of 60% is calculated it means that for every 100 in sales, contribution will on average amount to 60 with variable costs at 40. The C/S ratio is an important financial indicator because in some instances, key information may be unavailable to properly utilise the CVP model.

4 Question 4.4 Explain the relationship between cost structure and profit stability Cost structure refers to the proportion of fixed and variable costs within the total operating cost structure of the business. A business with a high proportion of fixed costs to total costs would be said to have a high fixed cost structure, sometimes called high operating gearing. Travel agents, although not capital intensive, would have a high fixed cost operating structure. Outdoor catering firms would have a mainly high variable cost structure. Operating risk is high where a business suffers from profit volatility and this occurs when profit is sensitive to small changes in key variables. Generally a business will have high operating risk or gearing when its cost structure is predominantly fixed. This is due to the fact that the pressure is on the business to achieve a required sales level to cover fixed costs. A business with a predominantly variable cost structure would have low operating risk or gearing as, should the business not achieve expected sales, the variable costs would not be charged. Compare and contrast the break-even chart and profit volume chart as providers of useful information to management The break-even chart and profit-volume chart are both graphic methods of presenting information supplied through the CVP model. While the break-even chart is quite useful in determining the break-even point and giving a visual overview of revenue and cost relationship for a business, the profit volume chart is very useful in showing the impact on profit of different activity levels. The profit-volume chart can show the profit or loss for any given scenario. Outline the arguments in favour of both the economists approach and the accountants approach to CVP analysis. The Economist approach argues that the accountants approach to CVP analysis is overly simplistic. And hence not accurate. Some of the assumptions that underlie the CVP analysis come into conflict with economic theory, especially the assumption of linearity and the constancy of selling price and variable cost per unit. Economists argue that lowering selling price acts as a catalyst to increasing demand and thus as sales volumes increase, so will variable costs. However, on account of economies of scale and quantity discounts, the variable cost per unit should fall. This is reflected in the total revenue and total cost curves that economists use, rather than the straight lines simplifications in the accountants CVP model.

5 1. The total revenue curve begins to slope upwards but less steeply, as price reductions become necessary and then slopes downward as the effect of price reductions outweigh the beneficial effect of volume increases, as the business approaches capacity. 2. The total cost curve increases at a slower rate as the effects of economies of scale and quantity discounts show up. However the curve begins a steeper upward trend as the business rises towards full capacity, because the variable cost per unit will normally increase as a result of diminishing returns. The accountants approach argues that it is not intended to provide a precise representation of total revenue and cost functions throughout all levels of activity. The objective of the accountant s CVP model is to represent an approximation of revenue and cost behaviour over the relevant range in the short term. As the relevant range of activity can be narrow and the short term time period less than 12 months, the linearity assumption is reasonable. Also, the cost of obtaining more accurate cost and revenue functions may outweigh the benefits to be gained from such information.

6 Question 4.5 a) Calculate the profit or loss if the above estimates prove to be correct b) What is the break-even point in units and revenue c) What is the margin of safety in units and revenue d) How many alterations need to be sold to achieve a profit of 30,000 e) How much should be charged for each alteration if a profit of 20 per cent of selling price is required based on existing forecast sales volume

7 Prepare a break-even chart summarising the above CVP relationship showing clearly the break-even point and the margin of safety.

8 Solution 4.6 a) Calculate the break-even point in units and revenue b) Calculate the margin of safety in units and revenue c) Calculate the number of installations needed to earn 50,000 profit d) Calculate the installation price to be charged to ensure that the venture breaks even, if the number of installations falls to 1,600 e) Explain the term contribution sales ratio (C/S ratio) and show how it is calculated The contribution sales ratio or C/S ratio is simply the contribution divided by sales, multiplied by 100. If a C/S ratio of 45% is calculated it means that for every 100 in sales, contribution will on average amount to 45 with variable costs at 55. It is calculated as follows

9 Question 4.7 a) Calculate the break-even point in both sales volume and revenue Before one can attempt this question one must classify costs into fixed and variable and calculate the contribution per person. In this question all the costs are fixed except for the commissions to the coach operators and management. Selling Price (5.00 x 100/113.5 to exclude vat) 4.40 Variable cost per person 4.4 x 15% 0.66 Contribution per person 3.74 Fixed costs Operating costs 39,500 Loan interest 4,800 44,300 Breakeven point in units and revenue Fixed costs 44,300 = 11,845 persons Contribution per person 3.74 Units x sales price 11,845 x 4.40 = 52,117 revenue b) If Charlie requires a profit of 10,000, what turnover must he achieve Fixed costs + Profit required = 44, ,000 = 14,519 persons Contribution per person 3.74 In sales value this will amount to 63,883 (14,519 x 4.40) c) If fixed costs increase by 10 per cent, calculate the level of sales Charlie will have to achieve to maintain his profit requirement In this case fixed costs will increase to 48,730 The answer to the question is calculated using the same formula as in (b) Fixed costs + Profit required = 48, ,000 = 15,703 persons Contribution per person 3.74 In sales value this will amount to 69,093 (15,703 x 4.40)

10 d) Prepare a profit volume graph showing clearly the break-even point and the margin of safety, if he achieves his required profit. e) Comment on the viability of the venture At present the venture is not a viable one. To break-even requires 11,845 customers which equates with 228 visitors per week. This is very high and will just achieve breakeven. The admission charge however is quire low. If this was increased to 9 including VAT ( 7.93 net) then the break-even point would fall to 6573 persons which is 126 per week (see below). This is a more realistic figure. The business should also consider adding in other revenue streams such as souvenir and café shop as well as possibly developing organic farm produce to sell. Selling price excluding VAT = ( 9 x 100/112.5) 7.93 Less variance costs 15% 1.19 Contribution 6.74 New break-even point = 44,300/6.74 = 6573 persons

11 Question 4.8 a) The profit or loss at each of the four levels of projected demand In this question the approach to take is to layout a profit statement at the four levels of demand and input the fixed and variable cost information given in the data. From this one can see that the calculation of sales is vital to answering the question. One can calculate sales at each level from using the C/S ratio of 60%. If the C/S = 60% that implies sales = 100% and variable costs = 40%. Thus sales is calculated by dividing the variable costs at each level by 40% and multiplying by 100%. For example sales under the adverse demand level is calculated as 30,000 x 100/40 = 75,000 Profit statement Adverse Average Good Excellent ('000) ('000) ('000) ('000) Sales Variable costs Contribution Fixed costs Net profit b) The break-even point in sales value As there is no unit information given in this question the break-even point must be calculated by using the contribution to sales ratio which calculates the break-even point in euro sales. Fixed costs 46,000 = 76,667 C/S ratio 0.60 c) The level of sales required for the business to make a return on an initial investment of 20 per cent As there is no unit information given in this question the sales to make a required profit must be calculated by using the contribution to sales ratio which calculates this in euro sales. The required profit is 100,000 (20% x 500,000). Fixed costs + required profit 46, ,000 = 243,333 C/S ratio 0.60

12 d) Briefly comment on the viability of the venture In this new venture according to the projected data the risk of failure seems quite low in the first year. However it does not seem likely that the project will achieve returns of 20%, at least not in its first year. Thus overall the project looks to be a safe one capable of achieving reasonable returns. It must be noted that this opinion is based on the accuracy of the research data which may be flawed.

13 Solution 4.9 a) Calculate the break-even point per return flight and the overall breakeven point per annum, assuming flights run 360 days per year As with most questions in CVP analysis the relevant information must be extrapolated from the question. The information required is as follows Fixed costs per return flight Variable costs per return flight Contribution per return flight Selling Price/person per return flight 120 Variable costs/person per return flight 20 Contribution 100 Fixed Costs per return flight Staff cost per flight 1,000 Airport charges per return flight 500 aircraft insurance per annum ( /4 x 360) 800 Fuel cost per return flight 4,500 Administration cost for the year 100,000/4 x ,870 BEP per flight 6870 / passengers BEP per annum ( x 4 x 360) passengers b) Calculate the annual profit given a load factor of 75 per cent This requires the calculation of annual sales, annual variable costs and annual fixed costs. Annual sales is calculated as 90 persons (120 x 75% loan factor) x 120 x 4 return flights x 360 days. Sales ( 120 x 120 x.75 x 4 x 360) 15,552,000 Less variable costs ( 20 x 120 x.75 x 4 x 360) 2,592,000 12,960,000 Less Fixed costs ( x 4 x 360) 9,892,080 Net profit 3,067,920

14 c) Prepare a break-even chart showing the break-even point and margin of safety based on a load factor of 75 per cent The margin of safety based on a loan factor of 75% is 21 people. This is calculated as simply forecast sales of 90 persons less break-even point sales 69 persons per return flight d) Calculate the number of customers per flight required to achieve a profit of 4,000,000 per annum Fixed costs + Profit required (4,000,000 /4 x 360) = 96 persons Contribution per person 100

15 Solution 4.10 a)calculate, based on variable cost levels of 35 per cent, 40 per cent and 45 per cent, the annual break-even point for the heritage centre, t he number of customers required to give the heritage centre a return on investment of 20 per cent and the margin of safety at this level of profit. Fixed costs are 135,000 Profit for a return on investment of 20% = 62,000 ( 310,000 x 20%) Variable costs Variable costs Variable costs 35% 40% 45% Sales price(9/1.125) Variable Costs Contribution i) Break-even point 135,000 / 5.2 = 135,000 / 4.8 = 135,000 / customers customers customers ii) RoI (20%x310,000) 135,000+62,000/ ,000+62,000/ ,000+62,000/4.4 37,885 customers 41,042 customers 44,773 customers Margin of safety customers customers customers 31.47% % Note: The margin of safety is calculated by subtracting the break-even point calculated in (1) from the number of customers required to achieve the return. This it is assumed is the forecast sales. The margin of safety can also be calculated as a percentage. For example under variable costs at 35% the % margin of safety is calculated as 11,923/ x 100

16 b) Based on variable cost levels of 40 per cent, prepare a profit volume chart estimating profit at demand levels of 25,000, 30,000 and 35,000 customers The profit or loss based on demand levels of 25,000, 30,000, and 35,000 customers is calculated below and presented in a profit volume chart Profit at demand levels of 25,000 30,000 35,000 Contribution 4.8 x 25, x 30, x 35, Less Fixed costs Profits c) If the initial study forecasts a demand of between 25,000 and 35,000 customers, comment on the viability of the venture. Based on the forecast figure the project is not feasibly if variable costs are greater than 40%. If variable costs are for example 35% then the project is a viable one however it is still unlikely to achieve the required returns of the investors.

17 Solution 4.11 a) Present a statement showing which of the marketing manager s proposals provide the greater amount of profit. To answer this question one needs to know the number of packages sold in the current year. To calculate this figure one needs to use the information given on the current yerar. For example current year profit amount to 150,000 after fixed costs of 120,000 are deducted. That implies that current yea contribution is 270,000. If the current year contribution per package is 125 then the number of packages sold in the current year amounts to 2160 (270,000/125). Now one can prepare profit statements based on the marketing managers proposals. Proposal 1 Proposal 2 Sales ( 250 x 2376) 594, X ,000 Variable costs ( 135 x 2376) 320, X ,500 Contribution ( 115 x 2376) 273, X ,500 Fixed costs 144, , , ,500 b) Calculate, in respect of each alternative, the break-even point in terms of sales volume and sales value Proposal-1 Proposal 2 Fixed costs ,000 Contribution per unit Break-even point (packages) = 1252 packages 1515 = packages 1252 x x 230 Break-even point (sales value) = 313,043 revenue = revenue

18 c) Prepare a profit volume chart based on the marketing managers first proposal and from the chart, estimate the profit or loss based on demand levels of 800, 1,000 and 1,500 packages sold From the profit volume chart 800 packages -52, packages -29, packages 28,500 d) Briefly outline four limitations of CVP analysis as a management information tool As with any model, there are necessary, simplifying assumptions on which the whole model is based. These assumptions also represent the limitations of the CVP model. It is essential that managers, when interpreting CVP information, keep in mind these limitations and try to assess their influence in practical terms. The assumptions are as follows: 1. Revenue and cost behaviour are linear over the relevant range, i.e. they take the form of a straight-line on a chart. 2. Variable costs per unit remain constant, thus ignoring the impact of quantity discounts.

19 3. Variable costs are directly proportional to sales. 4. Fixed costs remain constant within the relevant range. 5. All costs can be classified into their fixed and variable components. 6. Volume / activity levels are the only factors that influence costs. Clearly there are many other factors that influence revenues and costs such as quality of management and staff, industrial relations, economic conditions, working methods and conditions etc. 7. Selling price per unit remains constant although economists point out that in order to sell additional units, selling price is normally reduced. 8. The sales mix remains constant.

20 Solution 4.12 Workings Product 1 Product 2 Product 3 Product 4 Total Volume 15,000 5,000 10,000 7,500 37,500 Total sales revenue 37,500 16,250 43,000 13, ,875 Contribution per unit * Total contribution 23,250 10,000 23,000 8,250 64,500 *Contribution per unit is found by dividing sales revenue by volume to get sales price per unit and then deducting variable costs. a) Calculate the total revenue required to break-even based on the current sales mix Fixed cost: 37,500 units x 50p = 18,750 C/S ratio: 64,500 / 109,875 x 100 = 58.7% (average based on mix ratio) Break-even: 18,750 / = 31,942 revenue b) Calculate the number of units of each product required to break-even based on the current sales mix Average selling price: 109,875 / 37,500 = 2.93 Total units to break-even: 31,942 / 2.93 = 10,902 units Ratio: 15 : 5 : 10 : 7.5 Product 1: 10,902 / 37.5 x 15 4,361 units Product 2: 10,902 / 37.5 x 5 1,454 units Product 3: 10,902 / 37.5 x 10 2,907 units Product 4: 10,902 / 37.5 x 7.5 2,180 units c) Calculate the margin of safety in revenue 109,875-31,942 = 77,933 revenue d) Calculate the break-even point and margin of safety if the business follows a strategy of increasing advertising by 15,000 which is forecast to increase sales by 10 per cent Product 1 Product 2 Product 3 Product 4 Total Volume 15,000 5,000 10,000 7,500 37,500 New volume + 10% 16,500 5,500 11,000 8,250 41,250 Contribution per unit New contribution 25,575 11,000 25,300 9,075 70,950

21 New sales: 109,875 x 110% = 120,863 C/S ratio: 70,950 / 120,863 x 100 = 58.7% New fixed cost: 18, ,000 = 33,750 Break-even: 33,750 / = 57,493 Margin of safety: 120,863-57,493 = 63,370 e) Should the increase in advertising be implemented? Existing profit: 64,500-18,750 = 45,750 New profit: 70,950-33,750 = 37,200 NO, although the proposal increases volume the proposal should not be implemented as the profit will fall from 45,750 to 37,200 the break-even revenue will increase and the margin of safety decrease.

22 Solution 4.13 a) How much sales revenue must be generated per week from the shop in order to break-even. (You may assume the trading year is 50 weeks) To begin this question the information must be presented in a marginal costing format with costs classified according to whether they are fixed or variable and contribution calculated. Then calculating the average C/S ratio one can calculate the break-even point in sale value Skis Suits Total (168 x 100/120 ) (240x100/120) Selling Price excl vat Less variable costs per unit Purchases excluding vat Commissions Contribution per unit Fixed Costs Wages & salaries 45,000 Estimated Overheads for the year 14,400 Loan Interest (8% x 50,000) 4,000 Depreciation of fixed assets 10,000 73,400 Weighted Average C/S (82/340) = 0.24 Break-even point Fixed cost 73, ,833 C/S ratio 0.24 b) Calculate the amount of sales revenue to be generated per week if a return on equity of 20 percent is required A return on capital of 20% equates to a net profit figure of 32,000 (160,000 x 20%)

23 Using the required profit formula one can calculate the amount of sales that can generate such as return. Fixed costs + required profit 73, ,000= 439,167 C/S ratio.24 c) If an advertising campaign promoting a 15 per cent off deal on wet suits at the year-end is launched, how many extra wet suits need to be sold to cover the costs of the promotion which is estimated to cost 5,000. In this scenario one must calculate the new contribution per wetsuit after the 15% discount is taken into account. The costs of the promotion then divided by the new contribution to get the number of wets suits required to be sold to cover the additional fixed costs Selling price wet suits ( 200 x 85%) 170 Less variable costs Purchase 120 (170 x Commission 20%) Contribution per unit 16 Fixed costs / Contribution per unit 5000 / 16 = 313 wet suits Thus the promotion and discount are only worthwhile if more that 313 wet suits are sold.

### Summary. Chapter Five. Cost Volume Relations & Break Even Analysis

Summary Chapter Five Cost Volume Relations & Break Even Analysis 1. Introduction : The main aim of an undertaking is to earn profit. The cost volume profit (CVP) analysis helps management in finding out

### Chapter. Break-even analysis (CVP analysis)

Chapter 5 Break-even analysis (CVP analysis) 1 5.1 Introduction Cost-volume-profit (CVP) analysis looks at how profit changes when there are changes in variable costs, sales price, fixed costs and quantity.

### Cost VOLUME RELATIONS & BREAK EVEN ANALYSIS

1. Introduction The cost volume profit (CVP) analysis helps management in finding out the relationship of costs and revenues to profit. Cost depends on various factors like Volume of production Product

### Cost-Volume-Profit Analysis

Cost-Volume-Profit Analysis Cost-volume-profit (CVP) analysis is used to determine how changes in costs and volume affect a company's operating income and net income. In performing this analysis, there

### Part Five. Cost Volume Profit Analysis

Part Five Cost Volume Profit Analysis COST VOLUME PROFIT ANALYSIS Study of the effects of changes of costs and volume on a company s profits A critical factor in management decisions Important in profit

### Accounting Building Business Skills. Learning Objectives: Learning Objectives: Paul D. Kimmel. Chapter Fourteen: Cost-volume-profit Relationships

Accounting Building Business Skills Paul D. Kimmel Chapter Fourteen: Cost-volume-profit Relationships PowerPoint presentation by Kate Wynn-Williams University of Otago, Dunedin 2003 John Wiley & Sons Australia,

### Managerial Accounting Prof. Dr. Vardaraj Bapat Department of School of Management Indian Institute of Technology, Bombay

Managerial Accounting Prof. Dr. Vardaraj Bapat Department of School of Management Indian Institute of Technology, Bombay Lecture - 26 Cost Volume Profit Analysis Dear participations in our early session,

### The following purposes are served by analysis of cost-volume-profit relationship : i. To forecast profit fairly accurately. ii. iii. iv.

1. CVP analysis and purposes: Profit per unit of a product depends on its selling price and cost of sales. Total profit depends on sales volume which in turn depends inter alia on selling price. By and

### Module 12 : Cost Volume Profit Analysis. Lecture 1 : Cost Volume Profit Analysis

Module 12 : Cost Volume Profit Analysis Lecture 1 : Cost Volume Profit Analysis Objectives In this lecture you will learn the following Cost Volume Profit (CVP) Introduction. Fixed costs. Variable costs.

### Part II Management Accounting Decision-Making Tools

Part II Management Accounting Decision-Making Tools Chapter 7 Chapter 8 Chapter 9 Cost-Volume-Profit Analysis Comprehensive Business Budgeting Incremental Analysis and Decision-making Costs Chapter 10

### Break-Even Point and Cost-Volume-Profit Analysis

9 Break-Even Point and Cost-Volume-Profit Analysis Objectives After completing this chapter, you should be able to answer the following questions: LO.1 LO.2 LO.3 LO.4 LO.5 LO.6 What is the break-even point

### volume-profit relationships

Slide 1.3.1 1. Accounting for decision making 1.3 Cost-volume volume-profit relationships Slide 1.3.2 Introduction This chapter examines one of the most basic planning tools available to managers: cost

### BASIC CONCEPTS AND FORMULAE

12 Marginal Costing BASIC CONCEPTS AND FORMULAE Basic Concepts 1. Absorption Costing: a method of costing by which all direct cost and applicable overheads are charged to products or cost centers for finding

### Session 07. Cost-Volume-Profit Analysis

Session 07 Cost-Volume-Profit Analysis Programme : Executive Diploma in Business & Accounting (EDBA 2014) Course : Cost Analysis in Business Lecturer : Mr. Asanka Ranasinghe BBA (Finance), ACMA, CGMA Contact

### Chapter. Cost-Volume-Profit Relationships

Chapter 6 Cost-Volume-Profit Relationships 6-2 LEARNING OBJECTIVES After studying this chapter, you should be able to: 1. Explain how changes in activity affect contribution margin. 2. Compute the contribution

### Limited factor and break-even analysis

Chapter 7 Limited factor and break-even analysis Syllabus Content D - Marginal costing and decision-making 15% Contribution concept. Limiting factor analysis. Break-even charts, profit/volume graphs, break-even

### Topic Overview BAFS Elective Part Accounting Module Cost Accounting A10: Cost-Volume-Profit Analysis S5 / S6 2 lessons (40 minutes per lesson)

: Cost-Volume-Profit Analysis Topic Overview P.1 Topic Level Duration Topic Overview Accounting Module Cost Accounting A10: Cost-Volume-Profit Analysis S5 / S6 2 lessons (40 minutes per lesson) Learning

### ACCOUNTING FOR NON-ACCOUNTANTS MARGINAL COSTING

ACCOUNTING FOR NON-ACCOUNTANTS MARGINAL COSTING MARGINAL COSTING OBJECTIVE To be able to: Explain the relevance to management decisions of: Fixed costs Variable costs Contribution Prepare an operating

### Chapter 6 Cost-Volume-Profit Relationships

Chapter 6 Cost-Volume-Profit Relationships Solutions to Questions 6-1 The contribution margin (CM) ratio is the ratio of the total contribution margin to total sales revenue. It can be used in a variety

### Chapter 25 Cost-Volume-Profit Analysis Questions

Chapter 25 Cost-Volume-Profit Analysis Questions 1. Cost-volume-profit analysis is used to accomplish the first step in the planning phase for a business, which involves predicting the volume of activity,

### 12 Marginal Costing. 12.1 Definitions

12 Marginal Costing Learning Objectives When you have finished studying this chapter, you should be able to Understand the difference between absorption costing and marginal costing Understand the concept

### December 2013 exam. (4CW) SME cash and working capital. Instructions to students. reading time.

1 December 2013 exam (4CW) SME cash and working capital Instructions to students 1. Time allowed is 3 hours and 10 minutes, which includes 10 minutes reading time. 2. This is a closed book exam. 3. Use

### Management Accounting 2 nd Year Examination

Management Accounting 2 nd Year Examination August 2012 Exam Paper, Solutions & Examiner s Report NOTES TO USERS ABOUT THESE SOLUTIONS The solutions in this document are published by Accounting Technicians

### Assumptions of CVP Analysis. Objective 1: Contribution Margin Income Statement. Assumptions of CVP Analysis. Contribution Margin Example

Assumptions of CVP Analysis Cost-Volume-Profit Analysis Expenses can be classified as either variable or fixed. CVP relationships are linear over a wide range of production and sales. Sales prices, unit

### P2 Performance Management March 2014 examination

Management Level Paper P2 Performance Management March 2014 examination Examiner s Answers Note: Some of the answers that follow are fuller and more comprehensive than would be expected from a well-prepared

### Cost-Volume-Profit Analysis

CHAPTER 3 Overview Cost-Volume-Profit Analysis This chapter explains a planning tool called costvolume-profit (CVP) analysis. CVP analysis examines the behavior of total revenues, total costs, and operating

### It is important to know the following assumptions in CVP analysis before we can use it effectively.

Cost-Volume-Profit analysis (Relevant to AAT Examination Paper 3 Management Accounting) Li Tak Ming, Andy, Deputy Head, Department of Business Administration, Hong Kong Institute of Vocational Education

### Identify how changes in volume affect costs

Chapter 18 Identify how changes in volume affect Total variable change in direct proportion to changes in the volume of activity Unit variable cost remains constant Units produced 3 5 Total direct materials

### 11.3 BREAK-EVEN ANALYSIS. Fixed and Variable Costs

385 356 PART FOUR Capital Budgeting a large number of NPV estimates that we summarize by calculating the average value and some measure of how spread out the different possibilities are. For example, it

### CHAPTER 22 COST-VOLUME-PROFIT ANALYSIS

CHAPTER 22 COST-VOLUME-PROFIT ANALYSIS Related Assignment Materials Student Learning Objectives Conceptual objectives: C1. Describe different types of cost behavior in relation to production and sales

### WJEC Applied Business A level. ABUS 1 and ABUS 5

1 WJEC Applied Business A level ABUS 1 and ABUS 5 Additional information: formulae, layout and terminology ABUS 1 and ABUS 5 Accounting terminology A number of the terms used in Accounting are changing,

### COST-VOLUME-PROFIT RELATIONSHIPS

TM 5-1 COST-VOLUME-PROFIT RELATIONSHIPS Cost-volume-profit (CVP) analysis is concerned with the effects on net operating income of: Selling prices. Sales volume. Unit variable costs. Total fixed costs.

### Management Accounting 2 nd Year Examination

Management Accounting 2 nd Year Examination August 2010 Paper, Solutions & Examiner s Report NOTES TO USERS ABOUT THESE SOLUTIONS The solutions in this document are published by Accounting Technicians

### House Published on www.jps-dir.com

I. Cost - Volume - Profit (Break - Even) Analysis A. Definitions 1. Cost - Volume - Profit (CVP) Analysis: is a means of predicting the relationships among revenues, variable costs, and fixed costs at

### Understanding Financial Statements. For Your Business

Understanding Financial Statements For Your Business Disclaimer The information provided is for informational purposes only, does not constitute legal advice or create an attorney-client relationship,

### START YOUR OWN BUSINESS WORK BOOK 4 BUSINESS VIABILITY

START YOUR OWN BUSINESS WORK BOOK 4 BUSINESS VIABILITY BUSINESS VIABILITY What costs do I need to consider and what s the difference between startup, fixed and variable costs? How much do I need to sell

### Cost-Volume-Profit Analysis

Cost-Volume-Profit Analysis Cost-Volume-Profit Assumptions and Terminology 1 Changes in the level of revenues and costs arise only because of changes in the number of product (or service) units produced

### COST DATA FOR SHORT-RUN TACTICAL DECISION MAKING

COST DATA FOR SHORT-RUN TACTICAL DECISION MAKING To decide on the acceptance or rejection of a special order from a supplier, marginal costing and contribution analysis should be applied. The company may

### MANAGEMENT ACCOUNTING

CIPFA PROFESSIONAL QUALIFICATION CIPFA CERTIFICATE IN INTERNATIONAL PUBLIC FINANCIAL MANAGEMENT MANAGEMENT ACCOUNTING Instructions to candidates There are two sections in the examination. Section A contains

### Annual Qualification Review

LCCI International Qualifications Level 3 Certificate in Cost Accounting Annual Qualification Review 2008 For further information contact us: Tel. +44 (0) 8707 202909 Email. enquiries@ediplc.com www.lcci.org.uk

### Fundamentals Level Skills Module, Paper F5. 1 Hair Co. (a)

Answers Fundamentals Level Skills Module, Paper F5 Performance Management December 2012 Answers 1 Hair Co Weighted average contribution to sales ratio (WA C/S ratio) = total contribution/total sales revenue.

### Management Accounting and Decision-Making

Management Accounting 15 Management Accounting and Decision-Making Management accounting writers tend to present management accounting as a loosely connected set of decision making tools. Although the

### Course Title: Cost Accounting for Decision Making

Course Title: Cost Accounting for Decision Making Professional Development Programme on Enriching Knowledge of the Business, Accounting and Financial Studies (BAFS) Curriculum 1 Learning

### Chapter 10 Revenue, costs and break-even analysis

Chapter 10, costs and break-even analysis, costs and break-even analysis is the money a business makes from sales. In other words, it is the value of the sales and is also referred to as turnover. The

### Paper F5. Performance Management. Monday 3 December 2012. Fundamentals Level Skills Module. The Association of Chartered Certified Accountants

Fundamentals Level Skills Module Performance Management Monday 3 December 2012 Time allowed Reading and planning: Writing: 15 minutes 3 hours ALL FIVE questions are compulsory and MUST be attempted. Formulae

### averages simple arithmetic average (arithmetic mean) 28 29 weighted average (weighted arithmetic mean) 32 33

537 A accumulated value 298 future value of a constant-growth annuity future value of a deferred annuity 409 future value of a general annuity due 371 future value of an ordinary general annuity 360 future

### Quantitative Marketing Analysis

Quantitative Marketing Analysis CLASS 2 09.16.13 Revenue (sales) Income Statement Sections 5 Expenses Cost of goods sold (FC and VC) Operating expenses (generally FC) Profit 1 EXHIBIT 2.4: PRO FORMA INCOME

### CASH BUDGETS AND RELATED TOPICS

CASH BUDGETS AND RELATED TOPICS Article relevant to Formation 2 Management Accounting Author: Neil Hayden, current Examiner. In projected cash flow statements the information can be presented in a variety

### MANAGERIAL ACCOUNTING 7e Al L. Hartgraves Wayne J. Morse

MANAGERIAL ACCOUNTING 7e Al L. Hartgraves Wayne J. Morse Learning Objective 1 CHAPTER 3 Cost Volume Profit Analysis and Planning Identify the uses and limitations of traditional cost volume profit analysis.

### Marginal and. this chapter covers...

7 Marginal and absorption costing this chapter covers... This chapter focuses on the costing methods of marginal and absorption costing and compares the profit made by a business under each method. The

### Chapter 6. Chapter 6-1. Basics of Cost-Volume-Profit Analysis. Basics of Cost-Volume-Profit Analysis. Cost-Volume-Profit Relationships

Chapter 6-1 Chapter 6 Cost-Volume-Profit Relationships McGraw-Hill /Irwin The McGraw-Hill Companies, Inc., 2007 Basics of Cost-Volume-Profit Analysis Contribution Margin (CM) is the amount remaining from

### Costing For Decision-Making Break Even Analysis. Break-even even Analysis

Costing For Decision-Making Break Even Analysis CHAPTER 18 Introduction CVP Analysis Behaviour of Fixed and Variable Costs CVP Analysis and Break-even even Analysis Break-even even Analysis Break-even

### QWhat Does CHAPTER. Managerial Accounting and Cost-Volume-Profit Relationships. It Mean?

12 CHAPTER Managerial Accounting and Cost-Volume-Profit When asked by a marketing or production manager what a certain item or activity costs, the management accountant who asks Why do you want to know?

### Professional Development Programme on Enriching Knowledge of the Business, Accounting and Financial Studies (BAFS) Curriculum

Professional Development Programme on Enriching Knowledge of the Business, Accounting and Financial Studies (BAFS) Curriculum Course 1 : Contemporary Perspectives on Accounting Unit 8 : Cost Accounting

### Your Guide to Profit Guard

Dear Profit Master, Congratulations for taking the next step in improving the profitability and efficiency of your company! Profit Guard will provide you with comparative statistical and graphical measurements

### Marginal Costing and Absorption Costing

Marginal Costing and Absorption Costing Learning Objectives To understand the meanings of marginal cost and marginal costing To distinguish between marginal costing and absorption costing To ascertain

### P2 Performance Management

Performance Pillar P2 Performance Management 26 May 2010 Wednesday Afternoon Session Instructions to candidates You are allowed three hours to answer this question paper. You are allowed 20 minutes reading

### COST & BREAKEVEN ANALYSIS

COST & BREAKEVEN ANALYSIS http://www.tutorialspoint.com/managerial_economics/cost_and_breakeven_analysis.htm Copyright tutorialspoint.com In managerial economics another area which is of great importance

### Module 2: Preparing for Capital Venture Financing Building Pro-Forma Financial Statements

Module 2: Preparing for Capital Venture Financing Building Pro-Forma Financial Statements Module 2: Preparing for Capital Venture Financing Building Pro-Forma Financial Statements TABLE OF CONTENTS 1.0

### Cost-Volume-Profit Analysis

HOSP 2110 (Management Acct) Learning Centre Cost-Volume-Profit Analysis The basic principles of CVP analysis were covered in business math. CVP analysis can be done both graphically, through plotting the

### ACCA Certified Accounting Technician Examination Paper T10. Section A

Answers ACCA Certified Accounting Technician Examination Paper T10 Managing Finances December 10 Answers Section A 1 B \$ Non-current assets as at 1 December X6 250,000 Add back depreciation 0,000 Non-current

### Costing and Break-Even Analysis

W J E C B U S I N E S S S T U D I E S A L E V E L R E S O U R C E S. 28 Spec. Issue 2 Sept 212 Page 1 Costing and Break-Even Analysis Specification Requirements- Classify costs: fixed, variable and semi-variable.

### ANSWERS. QUESTION ONE a) MJENGO BUILDERS: CONTRACT ACCOUNT

ANSWERS QUESTION ONE a) MJENGO BUILDERS: CONTRACT ACCOUNT.. Direct wages 240,000 Material returns 2,500 Accrued wages 10,000 Plant & equipment value c/d 100,000 Materials issued 275,000 Materials closing

### CC.2.1.HS.F.5 -- Essential Choose a level of accuracy appropriate to limitations on measurement when reporting quantities. 1 -- Essential. them.

Topic: 04-Business Expense Management Know: Understand: Do: CC.2.1.HS.F.5 -- Essential Choose a level of accuracy appropriate to limitations on measurement when reporting quantities. CC.2.2.HS.D.8 -- Essential

### 01 In any business, or, indeed, in life in general, hindsight is a beautiful thing. If only we could look into a

01 technical cost-volumeprofit relevant to acca qualification paper F5 In any business, or, indeed, in life in general, hindsight is a beautiful thing. If only we could look into a crystal ball and find

### Module 10: Assessing the Business Case

Module 10: Assessing the Business Case Learning Objectives After completing this section, you will be able to: Do preliminary assessment of proposed energy management investments. The measures recommended

### FINANCIAL INTRODUCTION

FINANCIAL INTRODUCTION In earlier sections you calculated your cost of goods sold, overhead expenses and capital cost in order to help you determine the sales price of your product. In your business plan,

### 1. Which one of the following is the format of a CVP income statement? A. Sales Variable costs = Fixed costs + Net income.

1. Which one of the following is the format of a CVP income statement? A. Sales Variable costs = Fixed costs + Net income. B. Sales Fixed costs Variable costs Operating expenses = Net income. C. Sales

### Applications of Linear Equations. Chapter 5

5-2 Applications of Linear Equations Chapter 5 5-3 After completing this chapter, you will be able to: > Solve two linear equations in two variables > Solve problems that require setting up two linear

### Revision point: Fixed costs are those that do not change with changes in production levels, e.g. rent.

SECTION ONE BREAK-EVEN ANALYSIS Break-even point What is meant by the term break even? A firm breaks even when income is sufficiently high to exactly cover total costs therefore neither a profit nor a

### CHAPTER II LITE RATURE STUDY

CHAPTER II LITE RATURE STUDY 2.1. Cost Terminology Based on Charles T.Horngren (2009: 53), cost is a resource sacrificed or forgone to achieve a specific objective. A cost is usually measured as the monetary

### 2013 Accounting. Higher - Solutions. Finalised Marking Instructions

2013 Accounting Higher - Solutions Finalised Marking Instructions Scottish Qualifications Authority 2013 The information in this publication may be reproduced to support SQA qualifications only on a non-commercial

### Marginal and absorption costing

Marginal and absorption costing Topic list Syllabus reference 1 Marginal cost and marginal costing D4 2 The principles of marginal costing D4 3 Marginal costing and absorption costing and the calculation

### CHAPTER 3 COST-VOLUME-PROFIT ANALYSIS

CHAPTER 3 COST-VOLUME-PROFIT ANALYSIS NOTATION USED IN CHAPTER 3 SOLUTIONS SP: Selling price VCU: Variable cost per unit CMU: Contribution margin per unit FC: Fixed costs TOI: Target operating income 3-1

### Decision Making using Cost Concepts and CVP Analysis

CHAPTER 2 Decision Making using Cost Concepts and CVP Analysis Basic Concepts Absorption Costing * Assigns direct costs and all or part of overhead to cost units using one or more overhead absorption rates.

### Cost volume profit analysis

Cost volume profit analysis Shown below is a typical cost volume profit chart: Required: (a) Explain to a colleague who is not an accountant the reasons for the change in result on this cost volume profit

### Accounting Income, Residual Income and Valuation

Accounting Income, Residual Income and Valuation Ray Donnelly PhD, MSc, BComm, ACMA Examiner in Strategic Corporate Finance 1. Introduction The residual income (RI) for a firm for any year t is its accounting

### BUSINESS OCR LEVEL 2 CAMBRIDGE TECHNICAL. Cambridge TECHNICALS FINANCIAL FORECASTING FOR BUSINESS CERTIFICATE/DIPLOMA IN K/502/5252 LEVEL 2 UNIT 3

Cambridge TECHNICALS OCR LEVEL 2 CAMBRIDGE TECHNICAL CERTIFICATE/DIPLOMA IN BUSINESS FINANCIAL FORECASTING FOR BUSINESS K/502/5252 LEVEL 2 UNIT 3 GUIDED LEARNING HOURS: 30 UNIT CREDIT VALUE: 5 FINANCIAL

### Management Accounting 243 Pricing Decision Analysis

Management Accounting 243 Pricing Decision Analysis The setting of a price for a product is one of the most important decisions and certainly one of the more complex. A change in price not only directly

### Module 2: Preparing for Capital Venture Financing Financial Forecasting Methods TABLE OF CONTENTS

Module 2: Preparing for Capital Venture Financing Financial Forecasting Methods Module 2: Preparing for Capital Venture Financing Financial Forecasting Methods 1.0 FINANCIAL FORECASTING METHODS 1.01 Introduction

### Preparing a Successful Financial Plan

Topic 9 Preparing a Successful Financial Plan LEARNING OUTCOMES By the end of this topic, you should be able to: 1. Describe the overview of accounting methods; 2. Prepare the three major financial statements

### Blended Value Business Plan Pro Forma Income Statement User Guide

Blended Value Business Plan Pro Forma Income Statement User Guide OVERVIEW A business plan goes beyond the forecasting of a Feasibility Study. It provides details on the multiple factors required to develop

### The variable cost for each component are \$ 2,000 The components are sold for \$ The company sold during the prior year Ignore income taxes

Hilton Ex 8-26, 320-321 Air safety systems manufactures component used in radar safety systems The firms fixed costs are \$ 4,000,000 per year The variable cost for each component are \$ 2,000 The components

Quadratic Modeling Business 10 Profits In this activity, we are going to look at modeling business profits. We will allow q to represent the number of items manufactured and assume that all items that

### C 6 - ACRONYMS notesc6.doc Instructor s Supplemental Information Written by Professor Gregory M. Burbage, MBA, CPA, CMA, CFM

C 6 - ACRONYMS notesc6.doc Instructor s Supplemental Information ACRONYMS (ABBREVIATIONS) FOR USE WITH MANAGERIAL ACCOUNTING RELATING TO COST-VOLUME-PROFIT ANALYSIS. CM Contribution Margin in total dollars

### CHAPTER 19 (FIN MAN); CHAPTER 4 (MAN) COST BEHAVIOR AND COST-VOLUME-PROFIT ANALYSIS

(FIN MAN); CHAPTER 4 (MAN) COST BEHAVIOR AND COST-VOLUME-PROFIT ANALYSIS 1. Total variable costs change in proportion to changes in the level of activity. Unit variable costs remain the same regardless

### Strategy and Analysis in Using NPV. How Positive NPV Arises

Strategy and Analysis in Using NPV (Text reference: Chapter 8) Topics how positive NPV arises decision trees sensitivity analysis scenario analysis break-even analysis investment options AFM 271 - Strategy

### Financial Plan. A) Estimated One-Time Financial Requirements. Part One

Financial Plan The Financial Plan is perhaps one of the most important components of your Business Plan (see Business Plan Handout). Not only is it essential if you are seeking external financing it is

### Workbook 2 Overheads

Contents Highlights... 2 Quick Practice Session on Overheads... 2 Financial Quiz 2 - Overheads... 3 Learning Zone Overheads... 3 Fixed and Variable costs and Break-even analysis explained... 3 Fixed Costs...

### Paper F5. Performance Management. Monday 2 June 2014. Fundamentals Level Skills Module. The Association of Chartered Certified Accountants

Fundamentals Level Skills Module Performance Management Monday 2 June 2014 Time allowed Reading and planning: Writing: 15 minutes 3 hours ALL FIVE questions are compulsory and MUST be attempted. Formulae

### 3. Contribution is a) sales total cost, b) sales variable cost, c) sales fixed cost, d) none of these.

1. The term budget is derived from the French word -------- (a) Boget (b) Bougette (c ) Bogeget (d) None of these 2. Profit will be the same under absorption costing and marginal costing only when a) there

### Tutorial 3a Cost-Volume-Profit Analysis

Tutorial 3a Cost-Volume-Profit Analysis J. E. Cairnes School of Business and Economics NUI Galway Cost-Volume-Profit (CVP) Analysis This is a method used to examine the relationship between changes in

### Industry Report. Motels - 2014. Market intelligence specific to your industry. Provided by. Macquarie Business Accountants

Industry Report Market intelligence specific to your industry Motels - 2014 Provided by Macquarie Business Accountants Industry Statistics Sector Overview 4 Industry Statistics 4 Employment Data 5 Key

### ICASL - Business School Programme

ICASL - Business School Programme Quantitative Techniques for Business (Module 3) Financial Mathematics TUTORIAL 2A This chapter deals with problems related to investing money or capital in a business

### NSW BOARDING ACCOMODATION CALCULATOR USER GUIDELINES

NSW BOARDING ACCOMODATION CALCULATOR USER GUIDELINES ORIGINALLY PREPARED FOR NSW DEPARTMENT OF HOUSING IN MAY 2007 BY HILL PDA. AMENDED JULY 2010 BY HOUSING NSW 1 WHAT IS THE BOARDING ACCOMMODATION CALCULATOR?

### PRODUCTIVITY & GROWTH

Productivity Financial Tools There are a number of financial tools that can be used to measure the financial performance and potential contribution of improvement projects to the productivity of a business.

### The application of linear programming to management accounting

The application of linear programming to management accounting Solutions to Chapter 26 questions Question 26.16 (a) M F Contribution per unit 96 110 Litres of material P required 8 10 Contribution per

### Helena Company reports the following total costs at two levels of production.

Chapter 22 Helena Company reports the following total costs at two levels of production. 10,000 Units 20,000 Units Direct materials \$20,000 \$40,000 Maintenance 8,000 10,000 Direct labor 17,000 34,000 Indirect