CAF-5 · Chapter 13
Cost-Volume-Profit (CVP) Analysis MCQs with Answers
10 multiple-choice questions on Cost-Volume-Profit (CVP) Analysis for CAF-5 Management Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
According to the study text, what is the fundamental purpose of Cost-Volume-Profit (CVP) analysis?
- A) To allocate overhead costs accurately among different production departments.
- B) To study the interrelationships between cost, volume, and profit at different levels of activity.
- C) To calculate the standard cost and identify material and labour variances.
- D) To track the physical flow of raw materials in a continuous production process.
Show answer & explanation
Answer: B) To study the interrelationships between cost, volume, and profit at different levels of activity.
The study text defines CVP analysis as an application of marginal costing concepts that is specifically used to show how costs and profits change with changes in the volume of activity, forming a study of interrelationships between cost, volume, and profit.
Question 2
Which of the following formulas correctly calculates the Break-Even Point in terms of Sales Revenue?
- A) Total Fixed Costs ÷ Contribution Margin per unit
- B) Total Fixed Costs ÷ Contribution to Sales (C/S) Ratio
- C) Total Variable Costs ÷ Contribution Margin per unit
- D) (Total Fixed Costs + Target Profit) ÷ Contribution to Sales (C/S) Ratio
Show answer & explanation
Answer: B) Total Fixed Costs ÷ Contribution to Sales (C/S) Ratio
To find the break-even point in units, you divide fixed costs by contribution per unit. To find the break-even point directly in Sales Revenue, you divide the Total Fixed Costs by the C/S Ratio (Contribution / Sales).
Question 3
Entity E has monthly expected sales of Rs. 128,000. If the margin of safety is given as 6.25%, what is the break-even sales revenue for the entity?
- A) Rs. 136,000
- B) Rs. 8,000
- C) Rs. 120,000
- D) Rs. 126,000
Show answer & explanation
Answer: C) Rs. 120,000
The Margin of Safety is the difference between actual/expected sales and break-even sales. Margin of Safety in Rs = 6.25% of Expected Sales (128,000) = Rs. 8,000. Break-even Sales = Expected Sales - Margin of Safety = 128,000 - 8,000 = Rs. 120,000.
Question 4
A company plans to sell its product for Rs. 53 per unit. The expected variable cost is Rs. 21 per unit, and the total fixed costs for the year are Rs. 220,000. If the company wishes to achieve a target profit of Rs. 40,000, how many units must it sell?
- A) 8,125 units
- B) 6,875 units
- C) 4,150 units
- D) 12,380 units
Show answer & explanation
Answer: A) 8,125 units
Contribution per unit = Selling Price (53) - Variable Cost (21) = Rs. 32. To find target sales units: (Fixed Costs + Target Profit) ÷ Contribution per unit. (220,000 + 40,000) ÷ 32 = 260,000 ÷ 32 = 8,125 units.
Question 5
On a conventional Break-Even Chart, how is the "Total Fixed Costs" line typically drawn?
- A) As a straight line starting from the origin (0,0) and sloping upwards.
- B) As a straight line starting from the origin but curving downwards as volume increases.
- C) As a horizontal line parallel to the x-axis, starting at the level of total fixed costs on the y-axis.
- D) It is not drawn on a conventional break-even chart; only the PV chart shows fixed costs.
Show answer & explanation
Answer: C) As a horizontal line parallel to the x-axis, starting at the level of total fixed costs on the y-axis.
On a break-even chart, fixed costs remain constant regardless of the volume. Therefore, the line is drawn horizontally parallel to the activity (x) axis, starting from the total fixed cost value on the y-axis.
Question 6
On a Profit-Volume (PV) chart, what does the y-intercept (the point where the profit line crosses the vertical axis at zero sales volume) represent?
- A) The break-even point
- B) The margin of safety
- C) The maximum total contribution margin
- D) The total fixed costs (represented as a maximum loss)
Show answer & explanation
Answer: D) The total fixed costs (represented as a maximum loss)
On a Profit-Volume (PV) chart, if sales volume is zero, the company earns zero contribution and therefore incurs a loss exactly equal to its total fixed costs. This is represented by the y-intercept below the zero-profit line.
Question 7
When applying CVP analysis to a multi-product company, what crucial assumption must be made to calculate a single, overall break-even point?
- A) All products must have exactly the same selling price.
- B) All products must have the same contribution margin per unit.
- C) The sales mix (the proportion in which the different products are sold) remains constant.
- D) Fixed costs must be entirely apportioned to each individual product based on labour hours.
Show answer & explanation
Answer: C) The sales mix (the proportion in which the different products are sold) remains constant.
In multi-product CVP analysis, an aggregate or weighted average contribution margin is calculated. This is only valid under the strict assumption that the proportion (mix) in which the different products are sold remains constant.
Question 8
If a company successfully reduces its total fixed costs while maintaining the same selling price and variable cost per unit, what will be the effect on the break-even point and the margin of safety?
- A) Break-even point will increase, Margin of safety will decrease.
- B) Break-even point will decrease, Margin of safety will increase.
- C) Break-even point will decrease, Margin of safety will decrease.
- D) Both will remain entirely unchanged.
Show answer & explanation
Answer: B) Break-even point will decrease, Margin of safety will increase.
A reduction in fixed costs means fewer units need to be sold to cover them, hence the break-even point decreases. Because the break-even point is lower, the cushion between expected sales and break-even sales (the margin of safety) becomes larger.
Question 9
Solvent Limited sells Product A and Product B in a standard ratio of 2:1. The contribution margin is Rs. 10 for Product A and Rs. 20 for Product B. What is the weighted average contribution margin per unit of the mix?
- A) Rs. 15.00
- B) Rs. 30.00
- C) Rs. 13.33
- D) Rs. 10.00
Show answer & explanation
Answer: C) Rs. 13.33
The bundle/mix consists of 2 units of A and 1 unit of B (Total 3 units). Contribution of 2 units of A = 2 × 10 = Rs. 20. Contribution of 1 unit of B = 1 × 20 = Rs. 20. Total contribution of the mix (3 units) = Rs. 40. Weighted average contribution per unit = Rs. 40 ÷ 3 units = Rs. 13.33 per unit.
Question 10
What does the "Margin of Safety" fundamentally indicate to management?
- A) The exact amount of variable costs that can be saved without affecting quality.
- B) The maximum possible profit a company can earn if it operates at full 100% capacity.
- C) The percentage or amount by which budgeted or actual sales can fall before the company begins to incur a financial loss.
- D) The point where total sales revenue exactly equals total variable costs.
Show answer & explanation
Answer: C) The percentage or amount by which budgeted or actual sales can fall before the company begins to incur a financial loss.
The margin of safety represents the "buffer" a business has. It is calculated as budgeted/actual sales minus break-even sales, indicating how much sales can drop before reaching the break-even point where losses start.