# CVP II

rename
nguyp035's
version from
2016-05-17 21:40

## Section 1

Question | Answer |
---|---|

The cost structure of an organisation is.. | the relative proportion of its fixed and variable costs |

Operating leverage is;... | the extent to which an organisation uses fixed cost in its cost structure - greatest in companies that have a high proportion of fixed in relation to variable cost |

## Section 2

Question | Answer |
---|---|

Determining fixed and variable cost (and its sizes) | |

Cost estimations | |

Managerial judgement | the account classification method involves managers using their judgement to classify costs as exhibiting certain behaviors |

Engineering approach | studying processes that result in the incurrence of a cost - focus on relationship that should exist between inputs and outputs - using time and motion studies where employees are observed as they undertake work |

(Direct labour - analyse work performed) (Direct material - material for each unit is obtained from engineering drawings) | |

Quantitative analysis | Using scatter plot to plot data points and visualize relationships between cost and level of activity - regression to determine cost function, high low method |

## Section 3

Question | Answer |
---|---|

Fixed and variable costs are important as they impact on... | profitability in different conditions of demand |

When costs are predominantly fixed... | firms are at a comparative disadvantage if sales were near or below breakeven - at high level of sales they are better off.. |

When costs are predominantly variable... | firms would best be able to withstand low level of sales as fixed cost are more quickly covered and breakeven reached more quickly. - if fixed cost is a smaller proportion of total cost, then less out of the revenue of each unit sold will go to cost - worse if sales are higher |

## Section 4

Question | Answer |
---|---|

CVP + Multiple products? | Which mix of products will give highest total contribution margin given resources availiable - and make highest profit |

Quite common for manufacturers who sell number of products to.. | sell them in quantities which tend to bear a constant relationship to the number of units sold of each other type of product |

e.g. when BMW sells x6 3series cars it sells x4 7series and x1 8series car | |

this combination is known as... | standard sales pack - this relationship can be used to arrive at an average contribution margin |

THIS IS NOT PRECISE. INFO IS ONLY A GUIDE. NOT HELPFUL IN DECISION MAKING | |

Standard sales pack method | focuses first on calculating BE for a standard sales pack (all products together) 1) Find total CM for standard pack i.e. CM for combination of products which is most likely to be sold 2) find BE in terms of sales pack 3) find number of units of each product which must be sold at breakeven |

HOW? | 1 - Find total CM for standard pack by finding CM for each product individually and adding them together to get total |

2 - Work out BE in number of standard sales pack - (FC / TOTAL CM fr. std pack) | |

3 -Multiply total units at BE by proportion that each product represents of a standard sales pack (e.g. 5:3) multiply each separately and add together (gives how much of each to breakeven) | |

Weighted average CM method | based upon the standard sales pack but focuses on average CM of individual products as part of the standard sales pack - uses weighted average contribution margin of a unit |

HOW? | 1 - Find total CM for standard pack by finding CM for each product individually and adding them together to get total |

2 - Find weighted CM of one unit of product by (TOTAL CM std pack * total units in pack) | |

3 - Find breakeven by (FC / Weighted CM of one unit of product | |

4 - Multiply total units at BE by proportion each product represents (e.g. 5/8 & 3/8) needs to be multipled by BE units separately to find how much of each is sold to BE. | |

## Section 5

Question | Answer |
---|---|

Sales Mix in sales (dollars) - Weigted CM | |

1 - Calculate the contribution ratio for each product (CM/PRICE) | |

2 - Find weighted contribution (CM for each product * respective sales mix %) - add together for total | |

3 - Find BE in sales dollars (FC/Weighted contribution) add together for total | |

4 - Multiply BE by each products respective sales mix % | |

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