The margin of safety is a key concept of CVP analysis. The margin of safety is the
Answer(s): C
The margin of safety measures the amount by which sales may decline before losses occur. It is1 the excess of budgeted or actual sales over sales at the BEP. It may be stated in either units sold or sales revenue.
When used in cost-volume-profit analysis, sensitivity! Analysis
Sensitive analysis permits the decision maker to measure the effects of errors in certainty equivalents, which are estimated amounts developed by the best means available and assumed for purposes of a given decision model to be certain. The decision model then may be evaluated by changing certain data variables (certainty equivalents) critical to the success of the entity and observing the outcomes. This analysis allows the decision maker to quantify the effects of forecasting or prediction errors and to identify the most critical variables. For example, with respect to breakeven analysis, a firm might make computations using several different estimates of what fixed costs are expected to be. These calculations indicate how sensitive the results are to changes in fixed costs.
Which of the following would decrease unit contribution margin the most?
Answer(s): A
The plausible options are a decrease in selling price or an increase in variable expenses because UCM equals unit sales price minus unit variable cost. However, a given percentage change in unit sales price must have a greater effect than an equal but opposite percentage change in unit variable cost because the former is greater than the latter. The example below demonstrates this point.
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(s): D
A company's breakeven point will be reduced if fixed costs are lowered or the average unit contribution margin is increased. Given that petrol is the company's most profitable product, and assuming that it has a higher unit contribution margin than septine and tridol, an increase in sales of petrol relative to the other products will result in a higher average unit contribution margin and a lower breakeven point (fixed costs ÷ average UCM).
Product A accounts for 75% of a company's total sales revenue and has a variable cost equal to 60% of its selling price. Product B accounts for 25% of total sales revenue and has a variable cost equal to 85% of its selling price. What is the breakeven point given fixed costs of $150,000?
Answer(s): B
Sales = VC + PC. The proportion of each product's sales must be considered.
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