Question Tag: CVP Analysis

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  • 20 Marks

MI – May 2016 – L1 – SB – Q3 – Cost-Volume-Profit (CVP) Analysis

Perform various CVP calculations including break-even point, profit, margin of safety, and contribution for a product.

HEALTH-GRACE limited produces one standard product called Bambino Syrup which sells at ₦20.00 per bottle. The trading results for the six months ended June 30, 2015 were as follows:

Month Sales (Units) Profit / Loss (₦)
January 120,000 80,000
February 140,000 120,000
March 60,000 (40,000)
April 96,000 32,000
May 104,000 24,000
June 72,000 16,000

From the above information, you are required to calculate the following:

a. Break-even point in units and Naira value. (2 Marks)
b. Fixed cost. (2 Marks)
c. Variable cost per unit. (8 Marks)
d. Profit volume ratio. (2 Marks)
e. Contribution, assuming 70,000 bottles are sold. (2 Marks)
f. Margin of safety assuming 90,000 bottles are sold. (1 Mark)
g. The number of bottles to be sold to generate a profit after tax of ₦70,000 assuming the tax rate is 30%. (3 Marks)

a. Break-even point in units = Total fixed cost / contribution per unit = N160,000/ (20 – 18) = 80,000 units
Break-even point in value = Total fixed cost / contribution Margin Ratio = N160,000/ (2 / 20) = N1,600,000

b. Fixed cost: Fixed Cost = ₦1,600,000

c. Variable cost per unit:

Using High and Low Methods

Variable cost per unit = N18

d. Profit volume ratio: Profit / Volume Ratio = 2 / 20 x 100 = 10%

e. Contribution, assuming 70,000 bottles are sold: 70,000 x N2 = N140,000

f. Margin of safety assuming 90,000 bottles are sold: 90,000 – BEP in units = 90,000 – 80,000 = 10,000 units

g. The number of bottles to be sold to generate a profit after tax of ₦70,000 assuming the tax rate is 30%:

Sales in units = (Total fixed cost + target profit) / contribution per unit

Target profit = N70,000 / 30% = N233,333
Sales in units = (N160,000 + N233,333)/2 = 196,667 bottles

 

 

 

  • 15 Marks

MA – Nov 2017 – L2 – Q4 – Cost-volume-profit (CVP) analysis

Analyze the profit statement for two complementary products and evaluate the impact of various proposals on profit optimization.

Zumah Ltd manufactures and sells two complementary products: Hyline and Glycerin in the ratio 3:2. The result for the just ended period showed the following:

Product Hyline Glycerin
Selling price (GH¢) 20 15
Contribution/sales ratio 60% 40%
Profit/ (loss) (GH¢) 97,200 (3,600)

Joint fixed costs of GH¢180,000 are apportioned in proportion to the number of units of each product sold.

The company is in the process of preparing the budget for the coming year and is desirous of improving the performance of Glycerin. Therefore, the following proposals are being considered for implementation:

  1. Increase the price of Glycerin by 25% in expectation that the quantity demanded will reduce by 10%; or
  2. Retool the production process, which will result in a reduction of joint fixed costs by 15% and an increase in variable costs of each product by 10%; or
  3. Introduce proposals 1 and 2.

Required:

a) Determine the units of each product sold, and hence, prepare the profit statement for the just ended period.
b) Advise the management of Zumah Ltd as to which proposal to implement with a view to optimizing profits.

a) Determination of units sold and profit statement for the just-ended period:

Units Sold:

Let the total units sold be X.

Product Hyline Glycerin
Contribution/unit (GH¢) 12 6
Contribution: 60% of GH¢20 (Hyline) 12X
Contribution: 40% of GH¢15 (Glycerin) 6X
Total Contribution (GH¢) 9.60X
Fixed Costs (GH¢) 180,000
Profit (GH¢) 93,600

To find the total units sold:

9.60X−180,000=93,6009.60X – 180,000 = 93,600

X=28,500 unitsX = 28,500 \text{ units}

Thus:

  • Hyline units = 17,100 (60% of 28,500)
  • Glycerin units = 11,400 (40% of 28,500)

Profit Statement:

Product Hyline Glycerin
Contribution (GH¢) 205,200 (17,100 units @ GH¢12) 68,400 (11,400 units @ GH¢6)
Total Contribution (GH¢) 273,600
Fixed Costs (GH¢) (180,000)
Profit (GH¢) 93,600

(7 marks)

b) Evaluation of proposals and recommendation:

Proposal 1: Increase the price of Glycerin by 25%

Product Hyline Glycerin
Selling price (GH¢) 20 18.75
Variable cost/unit (GH¢) (8) (11.25)
Contribution/unit (GH¢) 12 7.50

Profit Statement:

Product Hyline Glycerin
Contribution (GH¢) 184,680 (15,390 units @ GH¢12) 76,950 (10,260 units @ GH¢7.50)
Total Contribution (GH¢) 261,630
Fixed Costs (GH¢) (180,000)
Profit (GH¢) 81,630

(3 marks)

Proposal 2: Retool production to reduce joint fixed costs by 15% and increase variable costs by 10%

Product Hyline Glycerin
Selling price (GH¢) 20 15
Variable cost/unit (GH¢) (8.8) (9.9)
Contribution/unit (GH¢) 11.20 5.10

Profit Statement:

Product Hyline Glycerin
Contribution (GH¢) 191,520 (17,100 units @ GH¢11.20) 58,140 (11,400 units @ GH¢5.10)
Total Contribution (GH¢) 249,660
Fixed Costs (GH¢) (153,000) (180,000 x 0.85)
Profit (GH¢) 96,660

(3 marks)

Proposal 3: Implement both Proposals 1 and 2

Product Hyline Glycerin
Selling price (GH¢) 20 18.75
Variable cost/unit (GH¢) (8.8) (9.90)
Contribution/unit (GH¢) 11.20 8.85

Profit Statement:

Product Hyline Glycerin
Contribution (GH¢) 172,368 (15,390 units @ GH¢11.20) 90,801 (10,260 units @ GH¢8.85)
Total Contribution (GH¢) 263,169
Fixed Costs (GH¢) (153,000)
Profit (GH¢) 110,169

Recommendation:

Implementing Proposal 3, which combines both proposals, would yield the highest incremental profit of GH¢16,569 compared to the current profit level.

(2 marks)

(Total: 15 marks)

  • 20 Marks

MA – Nov 2021 – L2 – Q5 – Cost-Volume-Profit (CVP) Analysis

Calculate breakeven point, profit under full capacity, and analyze profitability options for Claudia Footwear.

a) Claudia Footwear (CFW) has developed a new range of high-quality affordable sandals for beachwear. The sandals are based on an innovative design that protects feet from the effects of sun, salt, and sand. The company has already received some sales orders for 9,000 sandals which form 75% of the operating capacity of CFW, and production is due to commence next month. The Management Accountant has prepared the following projections based on 75% operating capacity for the trading year ahead:

Notes:

  1. Production overhead is made up of fixed and variable costs in the proportion of 7:3, respectively.
  2. GH¢36,000 of the total administration, selling, and distribution costs is fixed, and the remainder varies with sales volume.

Required:
i) Calculate the breakeven point in units and value. (4 marks)
ii) Calculate the profit that could be expected if the company operated at full capacity. (3 marks)

b) In order to enhance profitability, CFW has proposed the following options:

Option one:
If the selling price per unit were reduced by GH¢4, the increase in demand would utilize 90% of the company’s capacity without any additional advertising expenditure.

Option two:
To attract sufficient demand to utilize full capacity would require a 15% reduction in the current selling price. In addition, however, CFW would have to spend GH¢5,000 on a special advertising campaign.

Option three:
To attract sufficient demand to utilize full operating capacity without changing the selling price per unit, CFW has to spend GH¢35,000 on a special advertising campaign.

Required:
Present a statement showing the effect of the three alternatives compared with the original budget and advise management of CFW which of the FOUR possible plans ought to be adopted (the original budget plan or any of the three options). (10 marks)

c) State TWO (2) limitations and ONE (1) usefulness of Cost-Volume-Profit analysis. (3 marks)

 

Recommendation:
Based on the analysis, Option 3 should be adopted as it results in the highest profit of GH¢43,000. (10 marks)

c) Limitations and Usefulness of CVP Analysis:

Limitations:

  1. Assumption of Constant Fixed Costs:
    CVP analysis assumes that fixed costs remain constant, which may not be realistic as fixed costs can change with scale or over time. (1 mark)
  2. Assumption of Constant Variable Costs:
    It assumes that variable costs per unit remain constant, but in reality, economies of scale or other factors can cause variable costs to fluctuate. (1 mark)

Usefulness:

  1. Decision-Making Tool:
    CVP analysis is useful for managers as it helps in understanding the relationship between costs, volume, and profit, and aids in making informed pricing, production, and investment decisions. (1 mark)

(3 marks)

 

 

 

  • 15 Marks

MA – May 2019 – L2 – Q4 – Cost-volume-profit (CVP) analysis

Evaluate different options to improve profitability and perform CVP analysis including break-even and margin of safety calculations.

Boasiako Ltd manufactures high-quality coffee biscuits that are sold to hotels and restaurants in Koforidua. Two months ago, it had prepared a budget for the forthcoming financial year.

Details of the budget are presented below:
Sales GH¢6,000,000
Less:
Direct materials GH¢2,080,000
Direct labour GH¢1,160,000
Variable overheads GH¢840,000
Fixed overheads GH¢972,600
Total costs GH¢5,052,600
Profit GH¢947,400

The budget above has been prepared on the assumption that sales will be 800,000 packets of biscuits. However, due to changing economic conditions, the sales forecast for the year is now 720,000 packets of biscuits. It is expected that the selling price per unit, direct costs per unit, and variable overhead cost per unit will not change from those budgeted. It is also expected that fixed overheads will be the same as those budgeted.

Management is now considering a number of options to improve profitability for the forthcoming financial year:

Option 1:
Decrease the selling price by 20%. It is anticipated that this would increase sales volume by 25% on the forecast sales for the current year.

Option 2:
Decrease all variable costs by 10% and decrease fixed costs by 10%. This is not expected to have any impact on the sales level.

Option 3:
Decrease the selling price by 10% and decrease fixed costs by 5%. This is expected to increase sales volume by 25% on the forecast sales for the current year.

Required:
a) Calculate the expected profit for the current year (forecast sales). (2 marks)
b) Based on the forecast activity for the year, calculate:
i) The breakeven point in packets of biscuits.
ii) The margin of safety in percentage terms.
iii) The sales revenue required to earn a profit of GH¢1,440,000. (6 marks)
c) Evaluate the profitability of the three options and recommend the option that Boasiako Ltd should adopt. (7 marks)

a) Expected Profit for the Current Year (Forecast Sales):

Per Unit (GH¢) Total (GH¢)
Sales 7.50 5,400,000
Less: Variable Costs
Direct materials 2.60 1,872,000
Direct labour 1.45 1,044,000
Variable overheads 1.05 756,000
Total Variable Costs 5.10 3,672,000
Contribution 2.40 1,728,000
Less: Fixed Overheads 972,600
Profit 755,400

(2 marks)

b) CVP Analysis:

i) Breakeven Point (BEP) in Packets of Biscuits:
BEP (in units) = Total Fixed Costs / Contribution per unit
= GH¢972,600 / GH¢2.40
= 405,250 packets

ii) Margin of Safety in Percentage Terms:
Margin of Safety (%) = (Actual Sales – BEP Sales) / Actual Sales * 100
= (720,000 – 405,250) / 720,000 * 100
= 43.7%

iii) Sales Revenue Required to Earn a Profit of GH¢1,440,000:
Required Sales Revenue = (Total Fixed Costs + Target Profit) / Contribution to Sales Ratio
= (GH¢972,600 + GH¢1,440,000) / 0.32
= GH¢7,539,375

(6 marks evenly spread using ticks)

c) Evaluation of Profitability of the Three Options:

Option 1 (SP -20%, Volume +25%) Option 2 (VC -10%, FC -10%) Option 3 (SP -10%, FC -5%, Volume +25%) Current Situation
Units 900,000 720,000 900,000 720,000
Sales 5,400,000 5,400,000 6,075,000 5,400,000
Less: Variable Costs
Direct materials 4,590,000 3,304,800 4,590,000 3,672,000
Contribution 810,000 2,095,200 1,485,000 1,728,000
Less: Fixed Costs 972,600 875,340 923,970 972,600
Profit (162,600) 1,219,860 561,030 755,400

Recommendation:
The company should consider adopting Option 2 as it provides the highest profit among the options, with a profit of GH¢1,219,860.

  • 20 Marks

IMAC – NOV 2021 – L1 – Q1 – Budgeting

CVP analysis with calculation of contribution/sales ratio, total fixed costs, and breakeven sales value. Preparation of a flexed budget and identification of budget manual rules.

a) Cost-Volume-Profit (CVP) analysis is a way to find out how changes in variable and fixed costs affect a firm’s profit. Companies can use CVP to assess the impact on profit taking into consideration some assumptions.

Required:
State FIVE (5) assumptions underlying Cost-Volume-Profit Analysis. (5 marks)

b) The following data has been extracted from the operating records of Sharp Production Ltd:

Year Costs (GH¢) Profit (GH¢)
2019 402,000 54,000
2020 510,000 90,000

Required: i) Calculate the contribution/sales ratio for the company. (5 marks) ii) Compute the total fixed costs per annum. (5 marks) iii) Compute the sales value required to breakeven. (5 marks)

 

a) Assumptions underlying CVP Analysis:

  1. All costs can be conveniently segregated into fixed and variable elements.
  2. Total fixed costs remain constant while variable costs vary proportionately with the level of activity.
  3. The selling price per unit is given and remains constant over the relevant range of activity.
  4. All that is produced can be sold at the prevailing price.
  5. The only factor affecting costs and revenues is the volume of activity.
  6. Technology, production methods, and efficiency remain unchanged.
  7. There are no inventory level changes, or inventories are valued at marginal cost.
  8. There is no uncertainty.
  9. A single product or a constant product mix is produced and sold. (Any 5 points @ 1 mark each = 5 marks)

b) Workings:

Year Cost (GH¢) Profit (GH¢) Revenue (GH¢)
2019 402,000 54,000 456,000
2020 510,000 90,000 600,000
Revenue Cost
High 600,000
Low 456,000
Change 144,000

 

ii) Computation of Total Fixed Costs:

Year Revenue (GH¢) TC (GH¢) TVC (GH¢) TFC (GH¢)
2019 456,000 402,000 342,000 60,000
2020 600,000 510,000 450,000 60,000

Alternatively: Using higher sales level: Contribution = 0.25 x GH¢600,000 = GH¢150,000 Profit = contribution – FC GH¢90,000 = GH¢150,000 – FC This implies FC = GH¢60,000 (5 marks)

 

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