Question

Fuji Limited (“Fuji”) manufactures and sells dairy products made of soya beans. One of its main business is supplying packaged doufu to supermarket chains in Hong Kong. The sales and cost data of package doufu are as follows:
Unit selling price $20
Unit variable cost $10
Total fixed cost $200,000
Breakeven sales $400,000 or 20,000 units
Average monthly sales 30,000 units
Fuji’s raw material supplier has just announced a price increase in soya beans due to severe supply shortage. The higher cost is expected to increase the variable cost of packaged doufu by $3 per unit.
The Management is considering the following two independent options:
1 Increase unit selling price by $3 and sales volume is expected to decrease by 15%.
2 Invest in a new machine to semi-automate the production process; this will reduce the existing variable costs by 15%, increase the fixed cost by 30% and increased both the sales volume and selling price by 5%.
Required:
a Prepare a cost-volume-profit (CVP) income statement for each of the option.
b Based on your answer in (a), advise the management which option is a better choice. Explain your answers.

Answer 1

OPTION 1:- INCREASE UNIT SELLING PRICE BY $3 AND SALES VOLUME IS EXPECTED TO DECREASE BY 15%.

INCOME STATEMENT

SALES	25500 X 23	586500
LESS : VARIABLE COST	25500 X 13	(331500)
CONTRIBUTION		255000
LESS: FIXED COST		200000
NET INCOME		55000

NEW SELLING PRICE: 20+3 =23

REVISED VARIABLE COST = 10+3 =13

REVISED AVERAGE MONTHLY SALES 30000- (30000 X 15%) = 25500

OPTION 2:- INVEST IN A NEW MACHINE TO SEMI-AUTOMATE THE PRODUCTION PROCESS

SALES	31500 X 21	661500
LESS : VARIABLE COST	31500 X 8.5	(267750)
CONTRIBUTION		393750
LESS: FIXED COST		260000
NET INCOME		133750

NEW SELLING PRICE: 20+ 5% OF 20 = 21

REVISED VARIABLE COST = 10 – 15% OF 10 = 8.5

REVISED AVERAGE MONTHLY SALES 30000 + (30000 X 5%) = 31500

REVISED FIXED COST 200000+ 30% OF 200000=260000

OPTION 2 IS BETTER. SINCE CONTRIBUTION AND NET INCOME IS HIGHER IN OPTION 2