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PM Chapter 8 Questions Cost Volume Profit Analysis

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  1. HI
    i think question 5 is not totally right
    true the contribution need to equal to the fixed cost to break even but
    if i calculate the contribution using the cs ratio i end up with a contribution of $18.75 per unit
    the correct answer would be S.P=25,Contribution =21.25 and therefore a contribution of 3.75 per unit cs ration of 85%.
    Please correct me if i’m wrong.

  5. Hi Sir 馃檪

    In the end of last question we divide calculated total contribution by previous budgeted contribution per unit and there were previous absorption of fixed in this budgeted contribution per unit. I have question, why don,t we change absorption of fixed cost for unit of prod x? Shoudn’t we absorbe all fixed (without 6000 specyfic for y ) as we product and sell only x?

    • This question related to CVP analysis and therefore we need to know the contribution per unit for X, and the total contribution that is required (which is the profit required of 144,000 plus the total fixed costs). The total fixed costs will be as per the budget but less the specific fixed costs that relate to Y.
      We do not need to re-absorb and calculate a new profit per unit for X.

      Have you watched the free lectures on CVP analysis?

      • You are totaly right contribution will be the same because contribution per unit is constant. Sorry ?

      • Hello sir,

        In the 2nd question, there is total revenue which is 80,000/0.4 but why we’re dividing 0.4 in this?

      • The fixed costs are 80,000 and therefore the breakeven contribution is 80,000.

        Since the CS ratio is 0.4, the breakeven revenue must be 80,000/0.4. (0.4 is the same as 40%!)

        Did you watch my free lectures before attempting the test? The lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well.

  6. Hi, I don’t understand in Q3 &Q5 why fixed cost is total contribution? In Q3, it mentioned fixed cost is $80000, the answer write that contribution also $8000. Same as Q5

    • I don’t think you have watched the free lectures on CVP analysis (and there is no point in attempting the tests without watching the lectures first).

      Breakeven is when the profit is zero, and for zero profit the total contribution must be equal to the fixed costs.

    • For breakeven, the contribution must equal the fixed costs (and therefore the profit will be zero).

      I do suggest that you watch the free lectures on breakeven analysis where this is explained.

    • Because, by definition, the total fixed costs will not change whatever they end of producing (except for the overheads that are specific to Y – they will not be incurred if Y is not produced).

    • Contribution is, by definition, the profit before fixed overheads (which is the same as selling price less variable costs). $2.88 is the fixed overhead per unit.

      $196,800 is the total contribution required to give a profit (after $52,800 fixed overheads ) of $144,000.

      I do suggest that you watch he free lectures where all of this is explained.

      • Hi John
        I have just use the formula to obtain CM per unit as (Selling price/unit less Variable cost per unit and get the same answer am i correct??)

        i.e((24-(8.4+3.6+1.44)=10.56

      • That’s fine (although it is quicker to add the fixed costs to the profit, and in some questions you might not have the choice).

        Nobody will look at your workings for the MCQ’s – a computer marks the answer – and so how you arrive at the solution does not matter.

  13. Hi , please is there anything like negative contribution per unit??. Please what is total contribution when selling price per unit is 4 and variable cost per unit is 4.2. Units produced is 50,000 units. Lastly will a negative total contribution be deducted from the other positive total contribution wen finding a weighted average contribution??
    Thanks

  14. C/S ratio= 33.33%; Fixed costs = 30,000; target total contribution = $20,000.
    Sales revenue to earn target contribution = 1/33.33 x $20,000 = $60,006. (I got this correct)

    Now.. the problem in the question increased both the fixed costs to $100,000 and target total contribution to $200,000.
    I have no idea on how to find the sales revenue required to achieve the new target contribution.

    Here is the model solution: 1/38.6 x $200,000 = $518,135.

    Why and how did the C/S ratio increase? I don’t see how the increase of fixed costs could lead to an increase of C/S ratio as well.
    Please help me out!

  15. Hi sir,would like to ask Q4 of this test.
    The question states that fixed o/head includes apportioned general head cost.Is’nt apportioned o/head a non-cash,therefore irrelevant in decision making?Thanks

    • The general fixed overheads will still be incurred and will still need to be covered by the contribution. Only the overheads specific to Y will be saved.

      This is a question on break even analysis (not on relevant costing)

    • If the contribution is 30% of the sales, then the variable cost is 70% of sales.
      So for every $70 of variable cost, the contribution is $30.

      Therefore if there is a variable cost of $28 per unit, the contribution must be 30/70 x $28 = $12 per unit.

      The total contribution required = 21,600 + 60,000 = $81,600

      Therefore they have to sell 81600/12 = 6,800 units.

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