CVP ANALYSIS

1. CVP analysis is to:

“Study relationship between cost, volume and profit at various level of activities”

Why business need to know relationship between cost, volume and profit?

2. Breakeven (balik modal) is useful

To know whether sales made is going to cover all cost include - variable and fixed cost
BE FORMULA:
i. BE SALES = Fixed Cost ÷ CS ratio (single products)
÷ Weighted average CS ratio (multiple products)
ii. BE Unit = Fixed Cost ÷ Contribution/unit (single products)
÷ Weighted average contribution/unit (multiple products)

3. Based on above:
i. Let’s say CS ratio is, 2/10 = 0.1
Can you explain above C/S ratio? Logically what CS ratio is telling?

4. Why you need to calculate Margin of safety?

6. Why this line is straight? How is this is different

than the other one?

5. Why this line have 3 different line?

1. What is the impact to the line in a profit-volume chart when fixed cost increases and all selling price
per unit and variable cost per unit remain the same?
A The line moves up and the slopes become steeper
B The line moves down and the slopes becomes flatter
C The line moves up but remains parallel to the original line.
D The line moves down but remains parallel to the original line.

2. Hare Events is also considering a new category of 10 km race during the running festival. It expects
the race will have an entry fee of $20 per competitor and variable costs of $8 per competitor. Fixed
costs associated with this race will be $48,000. If the selling price per competitor, the variable cost
per competitor and total fixed costs for this 10 km race all increase by 10%, which of the following
statements will be true?

A Break-even volume will increase by 10% and break-even revenue will increase by 10%
B Break-even volume will remain unchanged but break-even revenue will increase by 10%
C Break-even volume will decrease by 10% but break-even revenue will remain unchanged
D Break-even volume and break-even revenue will both remain the same

3. A company makes and sells three products, M, N and Q.

M N Q
CS ratio 60% 40% 50%
Current sales mix 30% 30% 40%
If the mixed of the products produced and sold is changed to: M 50%, N30%, Q 20% what impact
would this have on the breakeven point assuming the sales mix is constant?
A. It would be increase
B. It would be decrease
C. It would remain unchanged
D. It cannot be determined without more information

4. Bpp course exam 1 Q11

i. Calculate the breakeven units for all three products assume constant mix _______________
ii. Calculate the breakeven sales for all three products assume constant mix _______________
iii. Based on above answer, calculate:
The breakeven units and sales for product E is ______________ units, $___________
The breakeven units and sales for product F is ______________ units, $___________
The breakeven units and sales for product G is ______________ units, $___________
 5. The profit/volume chart for a single company is as follows:

What is the contribution to sales ratio?

A 16%
B 28%
C 40%
D 72%

6. A company fixed cost of $1.3million. Variable costs are 55% of sales up to sales level of $3.0 million,
but at higher volume of production and sales,the variable cost for incremental production units
falls to 52%. What is the BE point in sales revenue to the nearest $1,000?

7. A company fixed cost of $1.3million. Variable costs are 55% of sales up to sales level of $1.5 million,
but at higher volume of production and sales,the variable cost for incremental production units
falls to 52%. What is the BE point in sales revenue to the nearest $1,000?

8. A company fixed cost of $1.3million and a step up fixed cost of $0.5million when the sales exceed
$3.0. Variable costs are 55% of sales million. What is the BE point in sales revenue to the
nearest $1,000?
.

9. A company fixed cost of $1.3million and a step up fixed costof $0.5million when the sales exceed
$1.5. Variable costs are 55% of sales million. What is the BE point in sales revenue to the
nearest $1,000?
.
7. What happened to BE if FC or VC changes after specified level of sales?
1. CALCULATE – intial BE before data is changed
2. CALCULATE - Later BE after data is changed

Draw 4 breakeven chart to show this 4 SITUATIONS: Show both BE (if applicable)
Change assume FC/VC increase.

Step up FC
I. Change in FC before initial BE is made
II. Change in FC after initial BE is made

Change in VC
i. Change in VC before initial BE is made
ii. Change in VC after initial BE is made
LIMITING FACTOR ANALYSIS

1. Considering the limited resources

“To analyse which production plan will generate the maximum contribution out of limited
resource that biz have”

2. How to treat differently if the biz have single or multiple resources

SINGLE MULTIPLE
Method 1.Rank – Highest C/LF ratio or Linear programming
2.Rank – Highest TP/LF or 1.Graph - optimal point = highest
contribution
3.Rank – Highest TPAR or 2.Simultaneous equation =
if cannot be seen from graph the
optimal mix of production or question
ask calculation

Find optimal production plan Find optimal production plan (OPP)

Find maximum contribution Find maximum contribution

3. Why it is important to calculate shadow price to business?

The shadow price of skilled labour for CBV is currently $8 per hour. What does this mean?
A. The cost of obtaining additional skilled labour resources is $8 per hour
B. There is a hidden cost of $8 for each hour of skilled labour actively worked
C. Contribution will be increased by $8 per hour for each extra hour of skilled labour that can be obtained
D. Total costs will be reduced by $8 for each additional hour of skilled labour that can be obtained
4. Revision question

1.Single LF and unlimited demand

Mahawangsa plc makes two products - Hang and Jebat - from the same raw material. The selling price and
cost details of these products are as shown below:
Hang Jebat
Selling price $ $
20 18
Direct material ($2.00 per kg) 8 5
Direct labour 2 3
Variable overhead 2. 1.50
12 9.50
Contribution per unit 8 8.5

The maximum demand for these products is unlimited.

What would the shadow price of these materials be if material were limited to 2,500 kgs per week?
2.Single LF and limited demand

Mahawangsa plc makes two products - Hang and Jebat - from the same raw material. The selling price and
cost details of these products are as shown below:
Hang Jebat
Selling price $ $
20 18
Direct material ($2.00 per kg) 8 5
Direct labour 2 3
Variable overhead 2. 1.50
12 9.50
Contribution per unit 8 8.5

The maximum demand for these products is 1,000 units per week for Hang and 1,500 units per week for Jebat.
What would the shadow price of these materials be if material were limited to 2,500 kgs per week?
3.Multiple LF usually with limited demand/unlimited demand

SHP = Contribution (New OPP with one additional resources) – Contribution (Original OPP)
OPP = Optimal production plan
(if graph given, find optimal point and work out as above to find out OPP using multiple factor)

Let M = the number of units of Product M produced and sold in June

Let E = the number of units of Product E produced and sold in June
The binding constraints are material A and B and the contribution at the current optimal production plan is
$64,800.

i. The shadow price of material A ___________________

ii. The shadow price of material B ___________________
iii. The shadow price of labour ______________________
iv. Which constraint is slack? _______________________
RELEVANT COST

Revision question

1.Which of the following best describes the term “relevant cash flow”?

A The benefit which would have been obtained from the best alternative foregone
B The difference in future operating cash flows resulting from a decision
C A future cash flow which cannot be avoided
D All cash flows, including financing cash flows, arising from a project

2. A machine owned by a company has been idle for some months but could now be used on a one
year contract which is under consideration. The net book value of the machine is $1,000. If not used
on this contract, the machine could be sold now for a net amount of $1,200. After use on the
contract, the machine would have no saleable value and the cost of disposing of it in one year’s time
would be $800.

What is the total relevant cost of the machine to the contract?

A $400
B $800
C $1,200
D $2,000

3. UU Company has been asked to quote for a special contract. The following information about
material X has been given:

Book value Scrap value Replacement cost $5.00 per kg

$0.50.per kg $5.50.per kg
The contract requires 10 kgs of Material X. There are 250 kgs of this material in inventory which was
purchased ln error over two years ago. lf Material X is modified, at a cost of $2 per kg, it could then
be used as a substitute for material Y which is in regular use and currently costs $6 per kg.

What is the relevant cost of the materials for the special contract?

A. $5
B. $40
C. $50
D. $55
4. Ace Limited is considering a new project that will require the use of a currently idle machine. The
machine has a current book value of $12,000 and a potential disposal value of $10,500 (before $200
disposal costs) and hence has been under depreciated by $1,500 over its life to date. lf the machine
is to be fit for purpose on the new project it will have to be relocated at a cost of $500 and refitted
at a further cost of $800.

What is the relevant cost of using the machine on the new project?

A. $9,000
B. $10,300
C. $11,600
D. $13,300

5. Gloop is considering the further processing of its face foundation cream by adding an anti-aging
compound. Existing sales are 25,000 tubs of cream but this is expected to increase by 25% if the anti-
aging cream is added. The anti-ageing compound will cost $2.50 per tub and a royalty will be payable
on sales revenue of 1.5% to the patent holder (Startled Limited). Gloop also thinks that the selling
price of the cream will increase from $15 to $20 per tub. Other material costs will unaffected at $6
per tub.

Gloop operates a total absorption costing system and allocates fixed costs to products at the rate of
$2 per $1 of sales revenue. How much better off financially will Gloop be if it decides to proceed
with this idea?

A. $125,0O0
B. $134,500
C. $137,500
D. $200,000

6. Jorioz Co makes joint products X and Y. $120,000 joint processing costs are incurred. At the split-
off point, 10,000 units of X and 9,000 units of Y are produced, with selling prices of $1.20 for X and
$1.50 for Y. The units of X could be processed further to make 8,000 units of product Z. The extra
costs incurred in this process would be fixed costs of $1,600 and variable costs of $0.50 per unit of
input. The selling price of Z would be $2.25. What would be the outcome if product X is further
processed?

A $600 loss
B $400 gain
C $3,900 gain
D $1,600 loss
PRICING

Revision questions

1. If a 6% fall in price causes a 9% increase in demand for a particular item, what is its price
elasticity of demand?

A More than one

B Positive but less than one C
Zero
D Between zero and minus one
2. A firm sells its product at $20 per unit in order to achieve its objective of maximising
profits. Selling price ($P) is related to quantity sold (Q) by the following equation:
P = 30 – 0.0002Q
If there are no opening or closing inventories, what is the marginal cost of production
at the optimum level of output?

A Zero
B $10
C $15
D $20

3. Which of the following statements is true of pricing?

A. Discrimination is always illegal so everyone should pay the same amount

B. Early adopters get a discount for being first in the market
C. Pricing against a similar competitor is important in the lnternet age
D. Price to make the most sales in that way you will always get the most profit

4. Which of the following conditions would need to be true for a price skimming policy to be
sensible?

A. An existing product where the owners have decided to

increase prices to move the product up market
B. Where the product has a long lifecycle
C. Where the product has a short lifecycle
D. Where only modest development costs had been incurred
5. Which of the following conditions would have to be true for a price penetration policy to be
sensible?

A. Where demand is highly inelastic

B. Where there is a short lifecycle
C. Where the normal margins gained are very low
D. Where demand is highly elastic
6. Which of the following conditions must be true for a price discrimination policy to
be sensible?
A. Buying power of customers must be similar in both market segments
B. Goods must not be able to move freely between market segments
C. Goods must be able to move freely between market segments
D. The demand curves in each market must be the same
RISK AND UNCERTAINTY

Revision questions

1. The following statements have been made about the use of expected values in decision
making:
(1) Expected values ignore the risk associated with decisions.
(2) Expected values are most useful for recurring rather than one-off events.
(3) Expected value is of limited use for decisions regarding outcomes which will
be repeated often.
(4) Using expected value in decision-making can lead to the worst possible
outcome being ignored.
(5) The reliability of expected value calculations is heavily influenced by the accuracy
of the probabilities assigned to outcomes.

Which of the above statements is/are true?

2. FP can choose from three mutually exclusive projects. The net cash flows from the
projects will depend on market demand. All of the projects will last for only one year.
The forecast net cash flows and their associated probabilities are given below:
Market Weak Average Good
demand
Probability 0.30 0.50 0.20
Project A 400 500 600
Project B 300 350 400
Project C 500 450 650

FP can commission a forecast that would tell it with certainty what demand conditions will
be before the decision is made about which project to invest in.

What is the maximum amount that FP should pay for the forecast?

EV Without information (EVWI):

Calculate EV for each decision/action:
Choose the highest EV as EVWI

EV with perfect information (EVPI):

Choose the best outcome in each circumstances/probabilities:
LEARNING CURVE

Revision questions

1. You have just timed a person doing a job a few times. The first time it took the person 25
minutes, the second time it took 20 minutes and the third time it took 17.55 minutes.
Which learning rate should you use?

2. Big Tech assembles desktop computers. The work is very labour intensive, and the first time
a member of staff assembles a computer, it takes 100 minutes. A learning curve of 95%
occurs, but this only applies to the first n units of production. The management accountant
has recorded the total time taken by a new member of staff to assemble the first 25 units of
output. Extracts from his table are as follows:
Cumulative Cumulative
output total time
(units) (minutes)
13 1,074.60
14 1,151.60
15 1,227.60
16 1,303.60
20 1,607.50
21 1,683.50
22 1,759.50

A steady state is reached at the nth unit of output, and all subsequent units take the same
amount of time to assemble as the nth unit. What is the value of n?
VARIANCE

1. Why variance need to be calculated in a company?

2. What you need to consider when you analyse variance?

BASIC VARIANCE

VARIANCE VARIANCE FORMULA

Price (AP-SP) AV
SALES
Volume (AV-SV) SP
Price (SP-AP) AQ
MATERIAL
Usage (SQ-AQ) SP
Rate (SR-AR) AHpaid
LABOUR Idle time (AHwork-AHpaid)SR
Efficiency (SH-AHwork) SR
VARIABLE Expenditure (SR-AR) AH (work)
OVERHEAD Efficiency (SH-AH) SR
Expenditure (BE-AE)

FIXED
Volume (Budgeted unit – actual unit) SR
OVERHEAD
-Efficiency (SH-AH) SR
-Capacity (BH-AH) SR

1. The following cause is/are LIKELY to be the reason for an adverse material price
variance except for?
A The budget incorporated an assumption of price inflation of 4% and the actual rate is 6%
B To reduce waste, a higher grade of material has been purchased
C A major supplier has introduced a rebate scheme which had not been planned for
D An inexperienced purchase clerk ordered materials from four different suppliers

2. Which one of the following is most likely to be the explanation for an adverse
material usage variance?
A A major supplier of material has reduced the rate of trade discount
B Rates of pay have been increased
C Quality standards have been increased
D Unforeseen material price rises have been incurred
3. Which one of the following is most likely to be the reason for a favourable labour
efficiency variance?

A An ideal standard was used as part of a quality improvement

programme
B A shortage of skilled staff meant that more trainees had been
recruited
C Lower grade material was purchased
D Staff have recently been trained in material handling techniques

4. Nujig Co reduced its quality specification for raw materials. The lower quality of materials
meant that a batch of products had to be reworked. What is the most likely effect on the
variances for materials usage and labour efficiency?

Material usage Labour efficiency

Adverse Adverse
Favourable Favourable

5. A company operates a standard marginal costing system. Last month its actual fixed
overhead expenditure was 10% above budget resulting in a fixed overhead expenditure
variance of $36,000. What was the actual expenditure on fixed overheads last month?

$396000
MIX AND YIELD VARIANCE

VARIANCE Interpretations Favourable Adverse

Mix Actual proportion of material
is different from standard
(AQSM vs AQAM)
Yield Actual input yielding different
level of output from standard
(AQSM vs SQSM)

Mix Actual proportion of sales is

different from standard
(AQSM vs AQAM)
Quantity Actual sales volume is
different from standard
(AQSM vs SQSM)

6. The following statements relate to the materials mix variance:

(i) A favourable total mix variance would suggest that a higher proportion of a cheaper
material is being used instead of a more expensive one.
(ii) A favourable total mix variance will usually result in a favourable material yield
variance.

Which of the above statements are true?

7. The following statements relate to the materials yield variance::

(i) An adverse total yield variance would suggest that less output has been achieved
for a given input, i.e. that the total input in volume is more than expected for the
output achieved
(ii) A favourable total mix variance will usually result in an adverse material
yieldvariance,

Which of the above statements are true?

 8. A company sells two products X and Y. Product X sells for $30 per unit and achieves a
standard contribution of $12 per unit, which is 40% of the selling price. Product Y, a new
product, sells for $80 per unit and achieves a standard contribution of just $10 per unit,
which is 12.5% of the selling price. Budgeted sales are 5,000 units of X and 3,000 units of Y.
However the sudden cancellation of an advertising campaign for Product Y has meant that
sales for the product will be well below budget, and there has been some price discounting
in an attempt to obtain sales for the product. Sales of X were in line with the budget. Which
of the following sales variances, if calculated, would you expect to show a favourable
variance for the period?

. A Sales mix variance

. B Sales price variance
. C Sales quantity variance
. D Sales volume variance
.
9. Interpret the following variances and find relation between all this variance. Calculate
material usage variance.

Month 1 Month 2
Material Price variances 25 Fav 2,100 Adv
Material Mix variance 100 Fav 600 Adv
Material Yield variance 20 Fav 400 Fav

Sales price 100 Adv 7,000 Fav

Sales contribution volume 75 Adv 3,000 Fav

10. Interpret the following variances and find relation between all this variance

Sales mix variance 6554 Adv

Sales quantity variance 48144 Fav

OPERATIONAL AND PLANNING VARIANCE

1. Why do you need to differentiate the variances into planning and operational?

2. Can you tell me what planning variance is telling you?

3. Can you tell me what operational variance is trying to inform you?

4. Variance usually examinable.

Material Sales
Price Price
Usage Volume

5. Why do you need to revise?

Why it is important to revise?

Material operational usage variance

11. A company manufactures a specific clinical machine used in hospitals. The company holds a
2% share of the market and the total market demand has been constant at 250,000
machines for the last few years. The budgeted selling price for each machine is $10,000
and standard contribution is equivalent to 10% of the budgeted selling price.

An initial performance review of the company's actual results showed a sales volume of
5,600 machines had been achieved. The total market demand for the machines, though,
had risen to 300,000 units.

What is the market share variance for the clinical machines?

$__________________ (ADVERSE OR FAVOURABLE)

Material operational price variance

12. Plus uses recycled plastic to manufacture shopping baskets for local retailers. The standard
price of the recycled plastic is $0.50 per kg and standard usage of recycled plastic is $0.20 for
each basket. The budgeted production was 80,000 baskets.

Due to recent government incentives to encourage recycling, the standard price of recycled
plastic was expected to reduce to $0.40 per kg. The actual price paid by the company was
$0.42 per kg and 100,000 baskets were manufactured using 20,000 kg of recycled plastics

What is the material operational variance?

Sales operational volume variance

13. Leaf Limited has had a mixed year. lts market share has improved two percentage points to
20%. The overall market had increased by 5% in the same period. . The budgeted sales were
252,000 units. The selling price is $20 and the variable cost per unit is $8.
The sales market share variance is: $_____________(ADVERSE OR FAVOURABLE)

Sales planning price variance

14. Car Co budgeted to sell 10,000 units of a new product in the period at a budgeted selling
price of $5 per unit. Actual sales volume in the period were as budgeted but the actual sales
price achieved as only $4 per unit. This was because a competitor launched a similar product
at the same time. Car Co had been unaware that this was going to happen when it prepared
its budget and, had it known this, it would revised its expected selling price to $3.80 per unit,
which was the price of the competitor’s product.

What is the sales price planning variance

15. At the start of the year, the standard material cost of a product was estimated. The actual
cost incurred during the recent month was higher than this, and the purchasing manager
is suggesting that the standard should be revised. He has suggested two reasons why the
standard should be revised:

(1) A delay in placing some orders led to the supplier charging a premium for
express delivery services. The delay was caused by poor organisation in the
purchasing department.
(2) Market prices of the material in question have risen by 10% on world commodity
markets.
Which of the above would be valid reasons for revising the standard?

A 1 only
B 2 only
C Neither 1 nor 2
D Both 1 and 2