9706 · 2.2.4
Cost-volume-profit analysis flashcards
Revision flashcards for Cambridge 9706 Cost-volume-profit analysis (syllabus 2.2.4). Flip, recall, then mark a real past-paper question.
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CVP break-even (units)?
Fixed costs ÷ Contribution per unit.
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Break-even revenue?
Fixed costs ÷ (Contribution per unit ÷ Selling price), i.e. FC ÷ C/S ratio.
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Margin of safety (units)?
Budgeted or actual sales units − Break-even units.
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Target profit output?
(Fixed costs + Target profit) ÷ Contribution per unit.
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What does a CVP chart show?
FC line (horizontal), TC line (sloping), TR line (from origin) - intersection = break-even.
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What is the C/S Ratio?
Contribution to Sales ratio. It's `Contribution per unit ÷ Selling price per unit`. It shows the percentage of each sales dollar that contributes to fixed costs and profit.
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Assumption: constant SP?
Selling price per unit does not change with volume.
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Assumption: linear VC?
Variable cost per unit stays constant as output changes.
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Why CVP for decisions?
Shows risk (margin of safety), required sales for profit targets, and effect of cost/price changes.
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How is break-even calculated for multiple products?
Calculate a weighted average contribution per unit based on a constant sales mix. Then, divide total fixed costs by this weighted average contribution.
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What does the Margin of Safety indicate?
It's a measure of risk, showing how much sales can decrease before the company starts making a loss. A higher margin of safety is better.
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What is contribution?
Selling Price per unit minus Variable Cost per unit. It's the amount each unit sold contributes towards covering fixed costs and then generating profit.