Skip to content

ACCA Applied Skills · Performance Management · Cost-volume-profit analysis (CVP)

Harlow Co sells a single product with a selling price of $20 per unit and a variable cost of $12 per unit. Fixed costs are $48,000 per period. Budgeted sales are 8,000 units. The company's CVP model assumes all units produced are sold. Management now wants to assess the reliability of the break-even point. Which of the following is a limitation of the model that would make the calculated margin of safety unreliable?

The limitation is that selling price may change once volume leaves the relevant range. CVP assumes constant selling price and variable cost per unit, so if price falls at higher volumes, contribution per unit changes and the calculated break-even and margin of safety are unreliable.

  1. ASelling price per unit may fall once sales volume exceeds the relevant rangeCorrect
  2. BFixed costs are stated as a total rather than per unit
  3. CContribution per unit is calculated as selling price minus variable cost
  4. DBreak-even volume is expressed in units rather than in sales revenue

Explanation

Break-even is 48,000 / 8 = 6,000 units, and the margin of safety is (8,000 - 6,000) / 8,000 = 25%. CVP assumes constant selling price and variable cost per unit within a relevant range. If price falls at higher volumes, contribution per unit changes and the calculated margin is unreliable. The other options describe normal features of the method, not limitations.

Did you get it right without looking?

One question tells you little. A timed set on Cost-volume-profit analysis (CVP) shows your real accuracy, how long you take and where you lose marks.

Practise Cost-volume-profit analysis (CVP)Free diagnostic mock

More Cost-volume-profit analysis (CVP) questions