Cost-volume-profit analysis: five questions to try now
Real past-paper questions, the answer key from the mark scheme, and the explanation that goes with it. No account needed to answer them.
Question 1
The budgeted income statement of J Limited shows the following. $ sales 400 000
variable costs 240 000
fixed costs 132 000
profit for the year 28 000
What is the margin of safety in dollars?
Answer: A.
Margin of safety is budgeted sales less break-even sales, so find break-even first. Contribution is 400 000 less 240 000, which is $160 000, and the contribution to sales ratio is 160 over 400, or 40%. Break-even revenue is fixed costs over that ratio, 132 000 divided by 0.4, which is $330 000. The margin of safety is therefore 400 000 less 330 000, which is $70 000. Note the check: $70 000 at a 40% ratio gives exactly the $28 000 profit, because every dollar past break-even is contribution.
Question 2
A business has the following information.
break-even point 5000 units
variable costs per unit $27
contribution to sales ratio 40%
What is the total fixed cost?
Answer: C.
Use the ratio to recover the selling price. A 40% contribution to sales ratio means variable cost is the other 60%, so $27 is 60% of the price and the price is $45. Contribution is therefore $18 a unit. At break-even the contribution exactly covers fixed cost, so fixed cost is 5000 times 18, which is $90 000. Treating the $27 as 40% of the price, or multiplying the break-even units by the variable cost, produces the other options.
Question 3
A business provided the following budgeted information. $ break-even sales revenue 300 000
fixed costs 180 000
target profit 144 000
What is the sales revenue required to achieve the target profit?
Answer: B.
Work the contribution to sales ratio out of the break-even figure. At break-even, contribution exactly covers fixed costs, so the ratio is 180 000 over 300 000, which is 60%. To reach a target profit the contribution must cover fixed costs AND the target, so the revenue needed is (180 000 plus 144 000) divided by 0.6, which is $540 000. Dividing only the target profit by the ratio, or adding it to the break-even revenue directly, gives the wrong options.
Question 4
Gareth makes and sells bread. He has calculated how many loaves he needs to sell each day in order to break even.
Which factor helps him accurately analyse his break-even point?
Answer: A.
Break-even analysis assumes everything produced is sold, so a baker who clears his production every day fits the model. The other three each break one of its assumptions: selling several types of bread means there is no single contribution per unit unless the mix is constant, a flour price that moves with the season breaks the constant variable cost, and cutting prices at the end of the day breaks the constant selling price. The question is really asking which situation does NOT violate an assumption.
Question 5
A company had the following results. $ sales revenue 230 000
variable costs 92 000
fixed costs 60 000
profit 78 000
What was its margin of safety in dollars?
Answer: B.
Margin of safety is how far sales can fall before profit disappears, so find break-even first. Contribution is 230 000 less 92 000, which is $138 000, and the ratio is 60%. Break-even revenue is 60 000 over 0.6, which is $100 000. The margin of safety is 230 000 less 100 000, or $130 000. The $100 000 option is break-even itself, and $138 000 is contribution, both of which are steps on the way rather than the answer.
What this practice covers
These questions are drawn from past CIE 9706 Accounting papers and filtered to cost-volume-profit analysis. You answer, you find out immediately whether you were right, and you get the reasoning for the correct option and for each distractor. Wrong answers go to a mistakes locker so you can come back to exactly those.
Practice is free. You need an account only so your progress and your mistakes are still there next time.
What examiners see students get wrong here
These are the errors that cost marks on cost-volume-profit analysis, taken from our own topic notes. Read them before you practise and you will recognise the traps in the questions.
- Dividing fixed costs by the selling price instead of by the contribution.
- Using the C/S ratio and reporting the answer in units, or the reverse.
- Drawing the revenue line from the fixed cost level rather than from the origin.
- Starting the profit-volume line at zero instead of at minus the fixed costs.
- Saying break-even falls when sales volume rises.
- Listing assumptions without saying why each one limits the technique.
- Forgetting to add the target profit to fixed costs before dividing.
Revise it first
If any of the above is unfamiliar, work through the notes before practising: Cost-volume-profit analysis revision notes.