Question

TOPIC		COST VOLUME PROFIT ANALYSIS
ASSIGNMENT DIRECTION & REQUIREMENT/S (Identify the ILOs to be assessed at the end of each requirement. Include the rubric or marking scheme for each item/requirement.)		This is an individual activity given to the students to do independently and submit their answer. Answer the question based on the understanding of the topics discussed and problems solved in the class lectures. Question/Problem Solving: Ahmed WLL produces and sells tables. The company sells total of 5000 tables in a year. The selling price of one table is 60 BD. The company has both variable and fixed expenses. The fixed expenses of manufacturing is 20,000 BD and fixed expense of selling is 10,000 BD. Particulars Total (In BD) Sales Direct Materials 124,700 Direct Labor 97,600 Manufacturing Overhead: Variable 14,500 Fixed Selling & Administrative: Variable 38,900 Fixed Required: Calculate the break even in sales (BD) and Breakeven in Units. Calculate the margin of safety. (Marking scheme: Computation = 3, correctness of figures = 2). Assume that the sales volume increases by 10 percent with no change in total fixed expenses, determine the operating income? . (Marking scheme: Computation = 1, correctness of figures = 1) If you want the profit percent to increase by 15 percent how much will be the breakeven sales. . (Marking scheme: Computation = 3, correctness of figures = 2) Now assume that your variable cost per unit has decreased by BD 20 and your overall fixed expense increased by 10,000, calculate the new breakeven level in units and break even in sales.

Answer 1

Part A)

The breakeven in sales, breakeven in units and margin of safety is calculated as below:

Variable Cost Per Unit = (Direct Materials + Direct Labor + Variable Manufacturing Overhead + Variable Selling and Administrative Expenses)/Total Units = (124,700 + 97,600 + 14,500 + 38,900)/5,000 = 55.14 BD

Contribution Margin Per Unit = Selling Price Per Unit - Variable Cost Per Unit = 60 - 55.14 = 4.86 BD

Contribution Ratio = Contribution Margin Per Unit/Selling Price Per Unit = 4.86/60 = 8.10%

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Breakeven in Sales = Total Fixed Costs/Contribution Ratio = (20,000 + 10,000)/8.10% = 370,370.37 BD

Breakeven in Units = Total Fixed Costs/Contribution Margin Per Unit = (20,000 + 10,000)/4.86 = 6172.83 or 6173 units

Margin of Safety = (Sales - Break Even Sales)/Sales = (5,000*60 - 370,370.37)/(5,000*60) = -23.46%

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Part B)

The value of operating income with increase in sales volume is determined as follows:

Sales Value [5,000*(1+10%)*60]	330,000
Less Total Variable Costs [5,000*(1+10%)*55.14]	303,270
Contribution Margin	26,730
Total Fixed Costs	30,000
Operating Income	-3,270 BD

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Part C)

The question is incorrectly stated. At breakeven sales, the profit is 0. So, the question of calculation of breakeven sales with increase in profit is wrong. We can, however, calculate the value of sales at which the company will be able to realize 15% increase in current profits.

Break Even Sales = (Desired Profit + Total Fixed Costs)/Contribution Margin Ratio

Current Profit/Loss = Total Sales*Contribution Margin Per Unit - Total Fixed Costs = 5,000*4.86 - 30,000 = -5,700 BD

An increase in profits would mean a reduction in the amount of loss. The desired amount of profit after increase of 15% would be BD [-5,700 + (15%*3,270)]

Sales = (-4,845 + 30,000)/8.10% = 310,555.56 BD

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Part D)

The new breakeven level in units and break even in sales is arrived as below:

Contribution Margin Per Unit = Selling Price - Revised Variable Cost = 60 - (55.14 - 20) = 24.86 BD

Contribution Ratio = Contribution Margin Per Unit/Selling Price Per Unit = 24.86/60 = 41.43%

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Breakeven in Sales = Total Fixed Costs/Contribution Ratio = (20,000 + 10,000 + 10,000)/41.43% = 96,540.63 BD

Breakeven in Units = Total Fixed Costs/Contribution Margin Per Unit = (20,000 + 10,000 + 10,000)/24.86 = 1609.01 or 1609 units