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Cost Volume Profit Analysis – Breakeven – ACCA Performance Management (PM)

VIVA

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  1. Hi John. Thank so much for the useful lectures. On the graph with profit/sales towards the end of the lecture: units 500 sales why did you consider contribution and not the sales revenue? you said contribution is £2000 and fixed costs is £1000 so profit is £1000. Shouldn`t it be instead sales are £3000 (500 units*£6) minus £1000 fixed costs so profit is £2000? Thanks

    • Hi, just to clarify: I could see that you did the revenue as well later on I just wanted a clarification on terminology. If sales is used in a graph to interpret in the exam, is it going to be considered as contribution or revenue. Thanks

  2. Dear John,

    As you stated that the avg. CS ratio cannot be calculated by taking the average of individually calculated CS ratio of 3 products. However, in answer section of the page it is mentioned that “Alternatively, the average CS ratio may be calculated by taking the weighted average of the
    individual CS ratios, weighting by the budgeted sales revenues”. Apparently there seems to be contradiction in these two. Can you help me understand that please.

    • What I actually say is that you cannot take the ‘normal’ average (i.e. simply add up three of them and divide by 3).

      Obviously you can take a weighted average, weighting by the sales revenue, and get exactly the same result because it is doing the same thing as I do in the lectures (but doing that normally takes longer).

  4. Thanks John for your details explanation. But I do not understand when the question asking the breakeven of sales in selling three products, why do we need to consider the highest CS ration product instead of the other products?

  9. Hi, brilliant lecture as always. So effectively in a basic manufacturing business where sales made = units products (i.e. no closing inventory) the GROSS PROFIT is actually TOTAL CONTRIBUTION and OPERATING PROFIT is the $200 in Example 1 (i.e. the FIXED COSTS are Admin expenses) right? I’m just trying to understand how these would be reflected on Financial Statements

    • If the fixed costs are non-production costs, then what you have written is correct.
      However the fixed costs could be production costs and if this was the case then both the gross profit and the operating profit would be 200.

  11. Thanks John for this brilliant presentation. However, from the graph, you used 500 units as the maximum output for the horizontal axis (x) instead of the budgeted sales and production of 300 units why? The same issue for the vertical axis (y) with a maximum value of $3,000 rather than $1,800 (300 x $6).Or was it done for illustrative purposes? Is it possible to read off contribution, variable cost and margin of safety from the graph? So the profit volume chart/graph can be drawn using the calculated BEP of 250 units and/or profit of $200 ((300 x $4 – $1,000 FC)

    • It was simply to end up with a reasonably sized graph – there are no ‘rules’ about this 🙂

      But do appreciate that you cannot be asked to draw the graph yourself in the exam. However you must understand it because one could be drawn in the question itself and you could be expected to interpret it.

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