Question

LOVE Enterprise is a seller of cupcakes. The variable cost is RM4 per unit and the fixed cost is RM800 for a month. A cupcake is sold at RM12.

Required:

(a) Briefly explain the importance of cost-volume-profit analysis for a business. (7    marks)

(b) Calculate the contribution margin for a unit of cupcake. (3    marks)

(c) Determine the number of cupcakes need to be sold to achieve break-even point. (3    marks)

(d) Determine the number of cupcakes that need to be sold to achieve the target profit of RM2,000 for a month. (3    marks)

(e) Determine the number of cupcakes that need to be sold to achieve break-even point, if the selling price is reduced by RM1. (3    marks)

(f) Determine the number of cupcakes that need to be sold to achieve break-even point, if the fixed cost increases by RM200. Assume the selling price is at RM12 and variable cost is at RM4 per cupcake. (3    marks)

(g) Determine the number of cupcakes that need to be sold to achieve break-even point, if the variable cost decreases by RM1. Assume the selling price is at RM12 and fixed cost is at RM800.

Answer 1

A) Cost volume profit analyse how changes in costs and volume affect their operating expenses and net income. it is used to compare different relationships, such as the cost of operating and producing goods, the amount of goods sold, and profits generated from the sale of those goods.

cost-volume-profit analysis is used to make informed decisions about the products or services the company sell. In this regard, CVP analysis plays a larger role in managerial accounting than in financing accounting and focuses on helping managers make smart, cost-effective decisions.

It provides a detaied analysis of the costs and its relation and potential for generating higher profit as fixed cost needs to be covered first to get break even and once it is reached the higher the quantity profit wil increase accordingly. It helps the manager to reach the minimum level of operation i.e break even units and sales that it will not be in loss.

B) Contribution margin per unit = Sales price per unit - variable cost per unit

Contribution margin per unit = RM 12 - RM 4 = RM 8.

contribution margin for a unit of cupcake = RM 8.

C) The Number of cupcakes for break even.

Break even in units = Fixed cost / Contribution margin per unit.

Break even in units = RM 800 / 8

number of cupcakes need to be sold to achieve break-even point = 100 cakes.

D) number of cupcakes that need to be sold to achieve the target profit of RM2,000 for a month.

Desired number units for target profit = ( Target profit + Fixed cost ) / Contribution margin per unit.

Desired number of units for target profit = ( 2000 + 800 ) / 8 = 2800 / 8

number of cupcakes that need to be sold to achieve the target profit of RM2,000 for a month = 350 cupcakes

E) Number of cupcakes that need to be sold to achieve break-even point, if the selling price is reduced by RM1.

Revised sales price = RM 11 , and variable cost per unit = RM 4

Thus contribution margin per unit = RM 11 - RM 4 = RM 7.

Thus Break even in units = Fixed cost / Contribution margin in units

Break even cupcakes = RM 800 / 7  

Number of cupcakes that need to be sold to achieve break-even point, = 114 cupcakes.

F) Determine the number of cupcakes that need to be sold to achieve break-even point, if the fixed cost increases by RM200. Assume the selling price is at RM12 and variable cost is at RM4 per cupcake.

Break even point = Fixed cost / Contribution margin per uinit

Break even point = RM 1000 / 8

The number of cupcakes that need to be sold to achieve break-even point = 125 cupcakes.

G) Determine the number of cupcakes that need to be sold to achieve break-even point, if the variable cost decreases by RM1. Assume the selling price is at RM12 and fixed cost is at RM800.

Contribution margin per unit = 12 - 3 = 9

Break even point = RM 800 / 9

the number of cupcakes that need to be sold to achieve break-even point = 89 cupcakes.