Cost-volume-profit (CVP) analysis is a key factor in many decisions, including choice of product lines, pricing of products, marketing strategy, and use of productive facilities. A calculation used in a CVP analysis is the breakeven point. Once the breakeven point has been reached, operating income will increase by the
Answer (B) is correct. At the breakeven point, total revenue equals total fixed costs plus the variable costs incurred at that level of production. Beyond the breakeven point, each unit sale will increase operating income by the unit contribution margin (unit sales price – unit variable cost) because fixed cost will already have been recovered.
The change in period-to-period operating income when using variable costing can be explained by the change in the
Answer (C) is correct. In a variable costing system, only the variable costs are recorded as product costs. All fixed costs are expensed in the period incurred. Because changes in the relationship between production levels and sales levels do not cause changes in the amount of fixed manufacturing cost expensed, profits more directly follow the trends in sales, especially when the UCM (selling price per unit – variable costs per unit) is constant. Unit sales times the UCM equals the total CM, and operating income (a pretax amount) equals the CM minus fixed costs of operations. If the UCM is constant and fixed costs are stable, the change in operating income will approximate the change in the CM (unit sales × UCM).
If inventories are expected to change, the type of costing that provides the best information for breakeven analysis is
Answer (B) is correct. A variable (direct) costing system is needed to perform CVP analysis because variable costing separates fixed costs from variable costs.
One of the major assumptions limiting the reliability of breakeven analysis is that
Answer (C) is correct. One of the inherent simplifying assumptions used in CVP analysis is that fixed costs remain constant over the relevant range of activity.
When used in cost-volume-profit analysis, sensitivity analysis
Answer (C) is correct. Sensitivity analysis is the process of observing how a mathematical model’s outcome is affected when the input parameters are changed. CVP analysis is extremely useful for this kind of exercise.
Marston Enterprises sells three chemicals: petrol, septine, and tridol. Petrol is the company’s most profitable product; tridol is the least profitable. Which one of the following events will definitely decrease the firm’s overall breakeven point for the upcoming accounting period?
Answer (D) is correct. Since petrol is the company’s most profitable product, it has a higher unit contribution margin than septine and tridol. Thus, an increase in sales of petrol relative to the other products will result in a higher weighted-average unit contribution margin and a lower breakeven point (fixed costs ÷ weighted-average UCM).
Which of the following will result in raising the breakeven point?
Answer (B) is correct. An increase in semivariable costs consists of either higher fixed cost, higher variable cost, or both. An increase in either will raise the BEP. If fixed costs increase, more units must be sold to cover the greater fixed costs. If variable costs increase, the unit contribution margin will decrease and again more units must be sold to cover the fixed costs.
A company’s breakeven point in sales dollars may be affected by equal percentage increases in both selling price and variable cost per unit (assume all other factors are constant within the relevant range). The equal percentage changes in selling price and variable cost per unit will cause the breakeven point in sales dollars to
Answer (D) is correct. The BEP in sales dollars is equal to total fixed costs divided by the CMR, and the CMR equals unit contribution margin divided by unit price. Equal percentage changes in the CMR numerator and denominator leave the overall ratio unaffected.
Algebraically, this can be shown as follows: If CM ÷ Price = CMR, then (1.1 × CM) ÷ (1.1 × Price) = CMR. With CMR unchanged, the ratio of fixed costs to CMR is unchanged.
The breakeven point in units increases when unit costs
Answer (A) is correct. The breakeven point in units is calculated by dividing total fixed costs by the unit contribution margin. If selling price is constant and costs increase, the unit contribution margin will decline, resulting in an increase of the breakeven point.
For a profitable company, the amount by which sales can decline before losses occur is known as the
Answer (D) is correct. The margin of safety measures the amount by which sales may decline before losses occur. It equals budgeted or actual sales minus sales at the BEP. It may be stated in either units sold or sales revenue.