Question

Purpose: To enable students in utilising the CVP analysis in making informed decisions and cost-effective moves about the products or services the business sells.

Requirement: Cost-volume-profit analysis

Sharks Ltd operates in the entertainment industry and one of its activities is to promote entertainment events throughout East Malaysia. The company is examining the viability of a fund-raising concert in Sabah. Estimated fixed costs are RM180,000. These include the fees paid to performers, the hire of the venue and advertising costs. Variable costs consist of the cost of a pre-packed buffet which will be provided by a firm of caterers at a price, which is currently being negotiated, but it is likely to be in the region of RM10 per ticket sold. The proposed price for the sale of a ticket is RM30. The management of Sharks Ltd has requested the following information: -

The number of tickets that must be sold to breakeven.                                                                     (1 mark)

How many tickets must be sold to earn RM60,000 target profit?                                    (1.5 marks)

What profit would result if 10,000 tickets were sold?                                                        (1.5 marks)

What selling price would have to be charged to give a profit of RM60,000 on sales of 10,000 tickets, fixed costs of RM180,000 and variable costs of RM10 per ticket?

(1.5 marks)

What is the profit-volume ratio?                                                                                            (1.5 marks)

With reference to part (a), what is the margin of safety given expected sales of 10,000 tickets?                                                                                                                                                      (1.5 marks)

Discuss ONE (1) advantage of managers possessing knowledge of the cost-volume-profit analysis.                                                                            (1.5 marks)           
                                                                                                                                               

Answer 1

Dear Student, please refer to answer below:

Fixed Cost = 180000

Selling Price = 30

Variable Cost = 10

The number of tickets that must be sold to breakeven.

Break-even point is the one where costs profits are zero, or the Revenue equals the costs.

Break-even point = X

30X - 10X - 180000 = 0

OR, 30X = 10X + 180000

20X = 180000

X = 9000 tickets [180000/20]

How many tickets must be sold to earn RM60,000 target profit?

Target Sales = X

30X - 10X - 180000 = 60000

20X = 240000

X = 12000 tickets [240000/20]

What profit would result if 10,000 tickets were sold?

Profit = 30*10000 - 10*10000 - 180000

Profit = 200000 - 180000 = RM 20000

What is the profit-volume ratio?

PV Ratio shows the relation between contribution (i.e. Revenue minus Variable Cost) and sales and is usually expressed in percentage.

Formulae: Contribution / Sales X 100

Contribution = Sales - Variable Cost

PV Ratio where target profit is RM60000:

PV Ratio = 240000 / 360000 * 100 = 67%

With reference to part (a), what is the margin of safety given expected sales of 10,000 tickets?

[Dear Student - In this part of the question, I am not clear what "part (a)" is, so I will assume it is talking about scenario where target profits are RM60000]

Marging of Safety = Profit / PV Ratio

MoS = 60000 / 67% = 90000

Or MoS = Actual Sales - Break-even Sales

MoS = 360000 - 270000 = 90000

Discuss ONE (1) advantage of managers possessing knowledge of the cost-volume-profit analysis.

As you can see above, CVP analysis is easy to perform. It is driven by simple formulae that uses - Sales, Variable and Fixed Costs and Profitability as parametres, and rest all can be calculated usic some basis mathematics formulae. Because of this ease of performance, a number of scenario's can be drawn to make a final decision.

Dear Student- Please feel free to write-back if you need any clarifications. Happy to help!