CVP Analysis - Lecture notes 9 PDF

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lecture delivered on cost volume profit analysis...

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ASHESI UNIVERSITY COLLEGE DEPARTMENT OF BUSINESS ADMINISTRATION MANAGERIAL ACCOUNTING TUTORIAL SET ON CVP ANALYSIS

Question 1 Draw the traditional breakeven chart and indicate the following: Profit and loss areas, total fixed cost, total variable cost, total cost, and sales revenue.

Question 2 Champion Co. Ltd manufactures and sells a specialized product called champion. According to the Management Accountant, the company expects to sell 15,000 units of the product in the current year for GH¢30 per unit. The variable cost per unit and the total fixed cost for the period are GH¢18 and GH¢120,000 respectively. The management of the firm is anxious to increase the company’s profit and has asked for analysis of a number of issues.

Required: a. Compute Champion’s contribution margin ratio and variable cost ratio b. Calculate the company’s break-even point in units and in cedis c. What is the company’s margin of safety in units, cedis and percentage? d. If the company wants to a target profit of at least GH¢45,000 next year, how many units of champion should be sold to meet this target profit? e. Calculate the company’s degree of operating leverage at the present level of sales. f. Using the degree of operating leverage calculated in (e), by what percentage will net operating income increases if the company’s sales increases by 4% in next year. g. If variable cost is increased by GH¢2 per unit and management expects to increase selling price by 10%, what volume of sales should the company make to achieve a profit of GH¢120,000.

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Question 2 Due to erratic sales of its sole product – a high-capacity battery for laptop computers – Naya Ltd has been experiencing difficulty for some time. The company’s contribution income statement for the most recent month is given below: Sales (19,500 units * $30 per unit)

$585,000

Variable expenses

409,500

Contribution

175,500

Fixed expenses

180,000

Net operating loss

$ (4,500)

Required: a. Compute the company’s CM ratio and its break-even point in both units and dollars. b. The president believes that a $16,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $80,000 increase in monthly sales. If the president is right, what will be the effect on the company’s net operating income or loss? (Use the incremental approach in preparing your answer.) c. The sales manager is convinced that a 10% reduction in the selling price, combined with an increase of $60,000 in the monthly advertising budget, will cause units sales to double. What will the new contribution format income statement look like if these changes are adopted? d. The Marketing Department thinks that a fancy new package for the laptop computers battery would help sales. The new package would increase packaging costs by 75 cents per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of $9,750? e. By automating certain operations, the company would reduce variable costs by $3 per unit. However, fixed costs would increase by $72,000 each month. i. Compute the new CM ratio and the new break-even point in units and dollars. ii. Assume that the company expects to sell 26,000 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are. iii. Would you recommend that the company automate its operations? Explain.

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