SECTION C – Decision Analysis (Weightage 20%)
S.No Questions Answers
1. What is CVP used for and CVP, also known as breakeven analysis, is used primarily for short-run
what does it analyze? decision-making.
CVP analysis examines the relationship among revenue, costs, and
profits.
2. What are the assumptions • All costs are either variable or fixed costs.
of CVP analysis? • Total costs and total revenues are predictable and linear.
• Fixed costs remain constant over the relevant range.
• Unit variable costs remain constant over the relevant range.
• The unit selling price and sales mix remain constant.
• Finished goods and work-in-process inventory do not change
significantly.
• The time value of money is ignored.
3. In terms of CVP analysis, Risk relates to the probability that an outcome has been predicted
what correctly. If the probability of an event occurring is close to 100%, there
are risk and uncertainty? is less risk than if the event has a low probability of
occurring. Uncertainty occurs when there is no basis to draw a
conclusion one way or the other.
4. How is unit contribution Selling Price per Unit
margin calculated? – Variable Costs per Unit
= Unit Contribution Margin
5. How is contribution margin Unit Contribution Margin
ratio calculated? Unit Selling Price
or
Total Contribution Margin
Total Revenue
6. How is the breakeven point BEP in Units = Total Fixed Costs ÷ Unit Contribution Margin
in number of
units calculated?
7. How is the breakeven point BEP in Revenue = Total Fixed Costs ÷ Contribution Margin Ratio
in revenue calculated?
8. How is a fixed dollar amount A fixed dollar amount of required profit is treated as an additional
of required profit treated fixed cost in the standard breakeven point formula.
in CVP analysis? Total Fixed Cost + Target Pre-Tax Profit
Contribution Margin Per Unit
9. How is a percent of sales A percent of sales required profit is treated as another variable cost in
required profit treated in CVP the calculation of contribution.
analysis? Selling price
– Variable cost per unit
– Target pre-tax net income per unit
= Adjusted contribution margin per unit
From the Desk of Muhammad Zain – Founder of Zain Academy Page 33 of 66
, 10. How is the profit point Target Volume = Total Fixed Cost
calculated with a percent of Adjusted Contribution Margin Per Unit
sales profit requirement? Target Revenue = Total Fixed Cost
Adjusted Contribution Margin Ratio
11. How is the breakeven point Fixed costs is divided by the weighted average unit contribution
calculated when the margin for the product mix as a whole, not for each individual product.
company The contribution is calculated for a standard basket of goods and the
sells more than one product? breakeven point is calculated for the number of baskets, rather than
individual units.
12. How does a change in the If the product(s) with higher contribution margins increase in
sales mix affect proportion to those with lower contribution margins,
the breakeven point (all operating income will increase and the breakeven point in
other things being equal)? number of units and amount of revenue will decrease. The mix
will have become more beneficial.
If the product(s) with lower contribution margins increase in
proportion to those with higher contribution margins,
operating income will decrease and the breakeven point in
number of units and revenue will increase. The mix will have
become less beneficial.
13. How are margin of Margin of Safety = Planned Sales – Breakeven Sales
safety and the margin of
safety ratio calculated? The margin of safety ratio is the margin of safety expressed as a
percentage of planned sales:
Margin of Safety Ratio = Margin of Safety ÷ Planned Sales
14. In marginal analysis, what Relevant revenues and relevant costs are those
are relevant expected future revenues and costs that differ among alternatives.
revenues and relevant costs? Only relevant revenues and costs need to be considered in the
decision-making process.
15. How are decisions made The two cost formulas are set equal to each other. The quantity that
when choosing between solves the equation is the breakeven quantity.
two cost options? If the expected level of sales will be higher than the breakeven
quantity, the company should select the option with more fixed costs.
If the expected level of sales will be lower than the breakeven quantity,
the company should select the option with more variable costs.
16. What are marginal revenue Marginal revenue is the revenue that is received from selling one more
and marginal cost? unit.
Marginal cost is the cost incurred to produce one more unit.
17. What Differential revenues and costs are those that differ between two
are differential revenues and alternatives.
costs?
18. What Incremental revenues and costs are incurred additionally as a result of
are incremental revenue and an activity.
costs?
19. What is a sunk cost? A cost for which the money has already been spent and cannot be
recovered.
From the Desk of Muhammad Zain – Founder of Zain Academy Page 34 of 66
S.No Questions Answers
1. What is CVP used for and CVP, also known as breakeven analysis, is used primarily for short-run
what does it analyze? decision-making.
CVP analysis examines the relationship among revenue, costs, and
profits.
2. What are the assumptions • All costs are either variable or fixed costs.
of CVP analysis? • Total costs and total revenues are predictable and linear.
• Fixed costs remain constant over the relevant range.
• Unit variable costs remain constant over the relevant range.
• The unit selling price and sales mix remain constant.
• Finished goods and work-in-process inventory do not change
significantly.
• The time value of money is ignored.
3. In terms of CVP analysis, Risk relates to the probability that an outcome has been predicted
what correctly. If the probability of an event occurring is close to 100%, there
are risk and uncertainty? is less risk than if the event has a low probability of
occurring. Uncertainty occurs when there is no basis to draw a
conclusion one way or the other.
4. How is unit contribution Selling Price per Unit
margin calculated? – Variable Costs per Unit
= Unit Contribution Margin
5. How is contribution margin Unit Contribution Margin
ratio calculated? Unit Selling Price
or
Total Contribution Margin
Total Revenue
6. How is the breakeven point BEP in Units = Total Fixed Costs ÷ Unit Contribution Margin
in number of
units calculated?
7. How is the breakeven point BEP in Revenue = Total Fixed Costs ÷ Contribution Margin Ratio
in revenue calculated?
8. How is a fixed dollar amount A fixed dollar amount of required profit is treated as an additional
of required profit treated fixed cost in the standard breakeven point formula.
in CVP analysis? Total Fixed Cost + Target Pre-Tax Profit
Contribution Margin Per Unit
9. How is a percent of sales A percent of sales required profit is treated as another variable cost in
required profit treated in CVP the calculation of contribution.
analysis? Selling price
– Variable cost per unit
– Target pre-tax net income per unit
= Adjusted contribution margin per unit
From the Desk of Muhammad Zain – Founder of Zain Academy Page 33 of 66
, 10. How is the profit point Target Volume = Total Fixed Cost
calculated with a percent of Adjusted Contribution Margin Per Unit
sales profit requirement? Target Revenue = Total Fixed Cost
Adjusted Contribution Margin Ratio
11. How is the breakeven point Fixed costs is divided by the weighted average unit contribution
calculated when the margin for the product mix as a whole, not for each individual product.
company The contribution is calculated for a standard basket of goods and the
sells more than one product? breakeven point is calculated for the number of baskets, rather than
individual units.
12. How does a change in the If the product(s) with higher contribution margins increase in
sales mix affect proportion to those with lower contribution margins,
the breakeven point (all operating income will increase and the breakeven point in
other things being equal)? number of units and amount of revenue will decrease. The mix
will have become more beneficial.
If the product(s) with lower contribution margins increase in
proportion to those with higher contribution margins,
operating income will decrease and the breakeven point in
number of units and revenue will increase. The mix will have
become less beneficial.
13. How are margin of Margin of Safety = Planned Sales – Breakeven Sales
safety and the margin of
safety ratio calculated? The margin of safety ratio is the margin of safety expressed as a
percentage of planned sales:
Margin of Safety Ratio = Margin of Safety ÷ Planned Sales
14. In marginal analysis, what Relevant revenues and relevant costs are those
are relevant expected future revenues and costs that differ among alternatives.
revenues and relevant costs? Only relevant revenues and costs need to be considered in the
decision-making process.
15. How are decisions made The two cost formulas are set equal to each other. The quantity that
when choosing between solves the equation is the breakeven quantity.
two cost options? If the expected level of sales will be higher than the breakeven
quantity, the company should select the option with more fixed costs.
If the expected level of sales will be lower than the breakeven quantity,
the company should select the option with more variable costs.
16. What are marginal revenue Marginal revenue is the revenue that is received from selling one more
and marginal cost? unit.
Marginal cost is the cost incurred to produce one more unit.
17. What Differential revenues and costs are those that differ between two
are differential revenues and alternatives.
costs?
18. What Incremental revenues and costs are incurred additionally as a result of
are incremental revenue and an activity.
costs?
19. What is a sunk cost? A cost for which the money has already been spent and cannot be
recovered.
From the Desk of Muhammad Zain – Founder of Zain Academy Page 34 of 66
