Question

Company's management are currently reviewing the performance of its range of ‘super-premium’ wines. The management team have asked you to perform an analysis on one of the wine products and to address some questions. You have gathered the following budgeted information for the 2020/21 year:

• The wine sells for $40 per bottle
• Direct materials are $9 per bottle
• Direct labour is $10 per bottle
• Variable overhead is $3 per bottle
• Budgeted sales volume is 50,000 bottles
• Fixed overheads are $765,000

1. Calculate the following:
   1. the contribution margin per bottle and the number of bottles that must be sold to break-even;
   2. the margin of safety in the number of bottles, revenue and as a percentage;
   3. the contribution margin ratio and the break-even point in revenues
2. Suppose the margin of safety was 5,000 bottles in 2019/20. Are operations more or less risky in 2020 as compared to 2019? Explain.
3. Suppose next year’s revenue estimate is $200,000 higher than originally predicted. What would be the estimated pre-tax profit?
4. Assume a tax rate of 30 per cent. How many bottles must be sold to earn an after-tax profit of $180,000?
5. One of the members of the management team has recently joined the company. His previous experience has been with small, owner-run businesses. he made a comment to one of his new colleagues that in his previous roles he had never heard of, or used, CVP analysis. Briefly explain why CVP analysis might be even more useful to small business owners than to managers of large entities.

Answer 1

Answer to first 4 sub-parts as per Answering Guidelines