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    Tutorial 7

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    Steven CHONG
    This document discusses cost-volume-profit (CVP) analysis and its assumptions. It then provides examples of using CVP analysis to calculate break-even points and sales levels needed to achieve profit targets for different companies. One example calculates the break-even point, sales needed for a $90,000 profit, and constructs a CVP graph. Another determines variable costs, break-even points, and sales required for a $48,000 after-tax profit. The last evaluates alternatives for a company to maximize profit, determining the highest is increasing price and variable costs.

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    Tutorial 7

    Uploaded by

    Steven CHONG
    33 views3 pages
    This document discusses cost-volume-profit (CVP) analysis and its assumptions. It then provides examples of using CVP analysis to calculate break-even points and sales levels needed to achieve profit targets for different companies. One example calculates the break-even point, sales needed for a $90,000 profit, and constructs a CVP graph. Another determines variable costs, break-even points, and sales required for a $48,000 after-tax profit. The last evaluates alternatives for a company to maximize profit, determining the highest is increasing price and variable costs.

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    This document discusses cost-volume-profit (CVP) analysis and its assumptions. It then provides examples of using CVP analysis to calculate break-even points and sales levels needed to achieve profit targets for different companies. One example calculates the break-even point, sales needed for a $90,000 profit, and constructs a CVP graph. Another determines variable costs, break-even points, and sales required for a $48,000 after-tax profit. The last evaluates alternatives for a company to maximize profit, determining the highest is increasing price and variable costs.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    33 views3 pages

    Tutorial 7

    Uploaded by

    Steven CHONG
    This document discusses cost-volume-profit (CVP) analysis and its assumptions. It then provides examples of using CVP analysis to calculate break-even points and sales levels needed to achieve profit targets for different companies. One example calculates the break-even point, sales needed for a $90,000 profit, and constructs a CVP graph. Another determines variable costs, break-even points, and sales required for a $48,000 after-tax profit. The last evaluates alternatives for a company to maximize profit, determining the highest is increasing price and variable costs.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 3

    Accounting and Financial Management

    Tutorial 7 Cost-Volume-Profit Analysis 1

    1. What are the assumptions that underlie CVP analysis?

    CVP analysis is a useful tool in analyzing the effects of changes in costs and volume on a company’s
    profits. However, there are some assumptions which underline CVP analysis. When these assumptions
    are not valid, the results of CVP analysis may be inaccurate. The five assumptions are:
    1. The behavior of both costs and revenues is linear throughout the relevant range of the activity
    index.
    2. All costs can be classified with reasonable accuracy as either fixed or variable.
    3. Changes in activity are the only factors that affect costs.
    4. All units produced are sold.
    5. When more than one type of product is sold, the sales mix will remain constant.

    2. A company manufactures and sells a product with a unit selling price of $250, variable cost per
    unit of $160, and fixed costs of $135,000.
    (a) Calculate the breakeven point in units and in sales revenue.
    (b) Calculate the sales in units and in dollars required to achieve a target operating profit of
    $90,000.
    (c) Prepare a CVP graph from zero units to 3,000 units of sales.

    (i) The contribution margin per unit is $90 ($250 – $160).


    $135,000
    Therefore, BEP in units = = 1,500
    $90

    $90
    Contribution margin ratio = = 0.36
    $250

    $135,000
    BE revenue = = $375,000
    0.36

    $135,000 + $90,000 $225,000


    (ii) Required sales in units = = = 2,500
    $90 $90

    $225,000
    Required sales revenue = = $625,000
    0.36

    (iii)

    Page 1 of 3
    Accounting and Financial Management

    3. Alden Company is the exclusive distributor for an automobile product that sells for $40 per unit
    and has a CM ratio of 30%. The company’s fixed expenses are $180,000 per year. The company
    plans to sell 16,000 units this year.
    (a) What are the variable expenses per unit?
    (b) What is the break-even point in unit sales and in dollar sales?
    (c) Assume a tax rate of 20% applies to Alden Company. What amount of unit sales and dollar
    sales is required to earn an annual after-tax profit of $48,000?
    (d) Assume that by using a more efficient shipper, the company is able to reduce its variable
    expenses by $4 per unit. What is the company’s new break-even point in unit sales and in
    dollar sales?

    (a) Variable expenses per unit = $40 × (1 – 0.30) = $28

    $180,000 $180,000
    (b) BEP in units = = = 15,000
    $40 × 0.30 $12

    $180,000
    BE revenue = = $600,000
    0.30

    $48,000
    $180,000 + [(1−0.20)]
    (c) Required sales in units =
    $12
    $180,000 + $60,000
    =
    $12
    = 20,000

    $48,000
    $180,000 + [(1−0.20)]
    Required sales revenue =
    0.30
    $180,000 + $60,000
    =
    0.30
    = $800,000

    $180,000
    (d) BEP in units = = 11,250
    ($40 × 0.30) + $4

    BE revenue = 11,250 × $40 = $450,000

    or

    ($40 × 0.30) + $4 $16


    CMR = = = 40%
    $40 $40

    $180,000
    BE revenue = = $450,000
    0.4

    Page 2 of 3
    Accounting and Financial Management

    4. Quantum Leap Sdn Bhd produces old-fashioned simple corkscrews. Last year was not a good year
    for sales but Quantum Leap expects the market to pick up this year. Last year’s income statement
    was:
    Sales revenue ($250 per corkscrew) $375,000
    Variable cost ($200 per corkscrew) 300,000
    Contribution margin 75,000
    Fixed cost 50,000
    Operating profit 25,000

    To take advantage of the anticipated growth in the market, Quantum Leap is considering the
    following alternative courses of action.
    (1) Do nothing. If Quantum Leap does nothing, it expects sales to increase by 12%.
    (2) Spend $2,000 on a new advertising campaign (a fixed cost) that is expected to increase sales by
    40%.
    (3) Raise the price of the corkscrew to $300. This is expected to decrease sales quantities by 25%.
    (4) Redesign the classic corkscrew and increase the selling price to $375 while increasing the
    variable cost by $70 per corkscrew. The sales level is not expected to change from last year.

    Required:
    Evaluate each of the alternatives considered by Quantum Leap. What should Quantum Leap do?
    (Hint: which alternative produces the highest operating profit?)

    Units sold = Total sales ÷ Selling price = $375,000 ÷ $250 per unit = 1,500 units

    (1) Sales increase 12%


    Sales revenues 1,500  1.12  $250 $420,000
    Variable costs 1,500  1.12  $200 336,000
    Contribution margin 84,000
    Fixed costs 50,000
    Operating profit $ 34,000

    (2) Increase fixed costs $2,000; Increase sales 40%


    Sales revenues 1,500  1.40  $250 $525,000
    Variable costs 1,500  1.40  $200 420,000
    Contribution margin 105,000
    Fixed costs ($50,000 + $2,000) 52,000
    Operating profit $ 53,000

    (3) Increase selling price to $300; Sales decrease 25%


    Sales revenues 1,500  0.75  $300 $337,500
    Variable costs 1,500  0.75  $200 225,000
    Contribution margin 112,500
    Fixed costs 50,000
    Operating profit $ 62,500

    (4) Increase selling price to $375; Variable costs increase $70 per corkscrew
    Sales revenues 1,500  $375 $562,500
    Variable costs 1,500  $270 405,000
    Contribution margin 157,500
    Fixed costs 50,000
    Operating profit $107,500

    Alternative (4) yields the highest operating income. If Quantum Leap is confident that unit sales will not
    decrease despite increasing the selling price, it should choose alternative (4).

    Page 3 of 3

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