200821 Financial Reports for Decision Making
REVIEW QUESTIONS
Topic 6: CVP Analysis
Remember ANY of the CVP questions can be answered using the basic profit equation:
Profit = Total revenue – Total variable costs - Total fixed costs
Using this approach means there is no need to remember any of the CVP equations (see
alternative workings file if you take this approach to answering the questions).
QUESTION 1:
Use the data given for Cafe Revive from the Demo Question and answer the following questions:
1. Assuming sales price per unit and total fixed costs remain the same, but variable costs increase
by 40%, what is the new breakeven point?
Selling price per unit = $5.50
New variable costs per unit = $2.20 x 1.40 = $3.08
New contribution margin per unit = $5.50 – $3.08 = $2.42
Fixed costs = $2 376
New break-even = $2 376 / $2.42 = 981.818 (approximately 982 units)
2. (a) Assuming sales price per unit remains the same but total fixed costs increase by 40% while
variable costs per unit decrease by 40%, what is the new breakeven point?
Selling price per unit = $5.50
New variable costs per unit = $2.20 x (1 - 0.40) = $1.32
New contribution margin per unit = $5.50 – $1.32 = $4.18
New Fixed costs = $2 376 x 1.40 = $3 326.40
New break-even = $3 326.40 / $4.18 = 795.789 (approximately 796 units)
(b) Assuming sales price per unit remains the same but variable costs increase by 40% while
total fixed costs decrease by 40%, what is the new breakeven point?
Selling price per unit = $5.50
New variable costs per unit = $2.20 x 1.40 = $3.08
New contribution margin per unit = $5.50 – $3.08 = $2.42
New Fixed costs = $2 376 x (1 - 0.40) = $1 425.60
New break-even = $1 425.60 / $2.42 = 589.09 (approximately 589 units)
Which is operationally riskier in Q2, alternative (a) or (b)?
It is alternative (a), with its higher fixed costs and higher breakeven point, which is operationally riskier.
To prove this, check the level of profit (or loss!) for each alternative at, firstly 1 500 units and, secondly, at
500 units.
At 1 500 units, alternative (a) generates a profit of about $2 944, while (b) can only generate approximately
$2 204.
But at 500 units, alternative (a) causes a loss of approx. $1 236, while the loss for (b) is only around $216.
This shows (a) is a lot riskier, as at very low sales volume, (a) can’t generate enough to cover fixed costs. In
contrast, alternative (b) doesn’t need to have as high a sales volume before it breaks – even.
REVIEW QUESTIONS
Topic 6: CVP Analysis
Remember ANY of the CVP questions can be answered using the basic profit equation:
Profit = Total revenue – Total variable costs - Total fixed costs
Using this approach means there is no need to remember any of the CVP equations (see
alternative workings file if you take this approach to answering the questions).
QUESTION 1:
Use the data given for Cafe Revive from the Demo Question and answer the following questions:
1. Assuming sales price per unit and total fixed costs remain the same, but variable costs increase
by 40%, what is the new breakeven point?
Selling price per unit = $5.50
New variable costs per unit = $2.20 x 1.40 = $3.08
New contribution margin per unit = $5.50 – $3.08 = $2.42
Fixed costs = $2 376
New break-even = $2 376 / $2.42 = 981.818 (approximately 982 units)
2. (a) Assuming sales price per unit remains the same but total fixed costs increase by 40% while
variable costs per unit decrease by 40%, what is the new breakeven point?
Selling price per unit = $5.50
New variable costs per unit = $2.20 x (1 - 0.40) = $1.32
New contribution margin per unit = $5.50 – $1.32 = $4.18
New Fixed costs = $2 376 x 1.40 = $3 326.40
New break-even = $3 326.40 / $4.18 = 795.789 (approximately 796 units)
(b) Assuming sales price per unit remains the same but variable costs increase by 40% while
total fixed costs decrease by 40%, what is the new breakeven point?
Selling price per unit = $5.50
New variable costs per unit = $2.20 x 1.40 = $3.08
New contribution margin per unit = $5.50 – $3.08 = $2.42
New Fixed costs = $2 376 x (1 - 0.40) = $1 425.60
New break-even = $1 425.60 / $2.42 = 589.09 (approximately 589 units)
Which is operationally riskier in Q2, alternative (a) or (b)?
It is alternative (a), with its higher fixed costs and higher breakeven point, which is operationally riskier.
To prove this, check the level of profit (or loss!) for each alternative at, firstly 1 500 units and, secondly, at
500 units.
At 1 500 units, alternative (a) generates a profit of about $2 944, while (b) can only generate approximately
$2 204.
But at 500 units, alternative (a) causes a loss of approx. $1 236, while the loss for (b) is only around $216.
This shows (a) is a lot riskier, as at very low sales volume, (a) can’t generate enough to cover fixed costs. In
contrast, alternative (b) doesn’t need to have as high a sales volume before it breaks – even.
