Question

QUESTION ONE

a. You are presented with the following information for Unilever Ghana Ltd.

            Fixed costs                             GH¢150,000

            Total costs                               GH¢ 400,000

            Sales (50,000 units)                 GH¢ 500,000

            Required:

            Calculate the following:

            (a) Break-even point in value terms and in units. (5marks)

            (b) Margin of safety in value and in units. (5marks)

            (c) Budgeted Profit for the period. (3marks)

            (d) What is the relationship between sales revenue and margin of safety? (2marks)   

                                                                                            

b. State five (5) uses of the Cost- Volume- Profit (CVP) Analysis. (5marks)

Answer 1

Fixed Costs = GH₵150,000

Total Costs = GH₵400,000

Sales (50,000 units) = GH₵500,000

Variable Costs

= Total Costs – Fixed Costs

= GH₵400,000 - GH₵150,000

= GH₵250,000

Variable Cost per unit

= Variable Costs / Units

= GH₵250,000 / 50,000

= GH₵5

Selling Price per unit

= Sales / Units

= GH₵500,000 / 50,000

= GH₵10

Contribution per unit

= Selling Price per unit – Variable Cost per unit

= GH₵10 - GH₵5

= GH₵5

Profit Volume Ratio

= Contribution / Sales

= GH₵5 / GH₵10

= 50%

Requirement a:

(a) Break-even point in value

= Fixed Costs / Profit Volume Ratio

= GH₵150,000 / 50%

= GH₵300,000

               

                Break-even point in units

                = Fixed Cost /Contribution per unit

                = GH₵150,000 / GH₵5

                = 30,000 units

                Break-even point:

Value = GH₵300,000

Units = 30,000

(b) Margin of safety in value

= Sales – Break-even point in value

= GH₵500,000 - GH₵300,000

= GH₵200,000

Margin of Safety in units

= Sales – Break-even point

= 50,000 – 30,000

= 20,000 units

Margin of Safety:

Value = GH₵200,000

Units = GH₵20,000

(c) Budgeted Profit for the period:

                Sales                                                                      GH₵500,000

                Less: Variable Costs                                        GH₵250,000

                Contribution                                                      GH₵250,000

                Less: Fixed Costs                                              GH₵150,000

                Budgeted Profit                                                                GH₵100,000

                Budgeted Profit = GH₵100,000

(d) If the sales revenue increases, Margin of Safety increases. Hence the sales revenue and Margin of Safety are directly proportional to each other.

Requirement b:

Uses of Cost – Volume – Profit Analysis:

1) It helps in analyzing which product is beneficial and which gives the maximum profit

2) It helps to arrive at the number of units required to achieve the target profit

3) It also helps to calculate the number of units required to be manufactured in order to avoid losses

4) It helps in making budgets

5) Based on the fixed costs , we can calculate the risks, if any.