Question

Please explain one or more of the following items to the best of your knowledge:
1- Why is CVP analysis useful? Why is it an important concept in managerial accounting?

2-  Effect of change in fixed cost on Breakeven point.
3- Change in unit variable cost on the contribution margin

4- Contribution Margin Ratio
5- Margin of Safety
6- What is the formula for Break-even point in Units

7- Operating Leverage
8- Variable /Absorption costing

Answer 1

Ans. 2

Effect of change in fixed cost on breakeven point:

Fixed cost and breakeven point have positive relation.

If the fixed cost increases the BEP sales will also increases

just as the fixed cost decreases the BEP sales will also decrease.

Ans.3

Change in unit Variable cost on the contribution margin:

Contribution margin and Variable cost have negative relation.

Contribution margin (per unit) is calculated by the following formula-

Selling price - Variable cost per unit

If the Unit Variable cost increase the Contribution margin decrease and when the Unit Variable cost decrease the Unit contribution margin will increase.

Example:

a

Sales = 100          VC   = 60

CM = 100 - 60

40

b

Sales = 100          VC   = 40

CM = 100 - 40

60

Ans. 4

Contribution margin ratio =    Sales - Variable cost / Sales * 100

OR

Contribution / Sales * 100

Ans. 5

Margin of safty   = Excess of BEP sales at budgeted or actual sales is called Margin of Safty.

It can be calculated by the following formulas:

Margin of Safty ( in amount)   = Present sales - BEP sales

OR

Profit / Contribution margin ratio

Ans. 6

Break-even point ( in units)   = Fixed cost / Contribution per unit

*Contribution per unit    =

Selling price - Variable cost per unit

Ans.7

Operating Leaverage = Operating leaverage can be calculated by the following way:

OL   = Contribution / EBIT

Sales

XXXX

Less: Variable cost

XXX

Contribution

XXXX

Less: Fixed cost

XX

EBIT

XXX