Question

Emprior Furniture sells two types of chairs (Flexi and Comfort). Joy Smith is the newly appointed manager of the business who has little knowledge of cost volume profit analysis. She as prepared an income statement for the next period as per below:

	Flexi	Comfort	Total
Units sold	190,000	63,000	253,000
Selling price	$30	$52
Revenue	$5,700,000	$3,276,000	$	8, 976,000
Variable costs per unit	$19	$31
Total variable costs	$3,610,000	$1, 953,000	$	5,563,000
Contribution margin	$11	$21
per unit
Total contribution	$2, 090,000	$1,323,000	$	3,413,000
margin
Fixed costs			$	2,450,000
Profit			$	963,000

REQUIRED:

Explain the benefits of ‘cost volume profit analysis’ in Emprior Furniture to Joy (1 mark).

Describe the assumptions that Joy must consider in conducting CVP analysis .

Calculate the break-even point in units, assuming that the planned sales mix is attained .

Calculate the break-even point in in units:

If only Flexi chairs are sold (1.5 marks)

If only Comfort chairs are sold (1.5 marks)

Suppose 265000 units are sold out but only 65000 of them are Comfort chairs, calculate the break-even point in number of units .

Compare your answers in part 3 and 1. What is the major lesson of this problem? .

Answer 1

1) Explanation of the benefits of ‘cost volume profit analysis’ in Emprior Furniture to Joy.

CVP analysis helps in determining the most advantageous combination of the selling price, volume, and cost. It is a mathematical model used by higher management for decision making and forecasting profit for different level of outputs.

2) Joy must consider the following assumptions in conducting CVP analysis.

1. All cost should be classified as either variable cost or fixed cost.

2. Cost should be linear with respect to relevant range.

3. Selling price remains fixed irrespective of no of volume.

4. No major change in size of inventory.

5. It applies in short run period.

6. Variable cost only affected by the volume of units.

3) Breakeven units assuming that the planned sales mix is attained

	Flexi	Comfort	Total
Units sold	190000	63000	253000
Sales Mix % (a)	75.10%	24.90%	100.00%
Contribution margin (b)	$            11.00	$    21.00
Weighted Average CM per Unit C=a*b	$               8.26	$       5.23	$    13.49

Break-even Point in Units of Sales Mix = Total Fixed Cost / Weighted Average CM per Unit

=$2450,000/$13.49

= 181,614 units

4) Calculate the break-even point in in units:

a) If only Flexi chairs are sold

Break-even Point in Units = Total Fixed Cost / CM per Unit

=$2450,000/$11

= 222,727 units

b) If only Comfort chairs are sold

Break-even Point in Units = Total Fixed Cost / CM per Unit

=$2450,000/$21

= 116,667 units

Note: As per guidelines I have ansered first four sub parts of the question.