Question

Question 2                                                                                                              30 Marks

Elica is a trading company which sells different types of products to retail stores. The Company is using a decision-making technique CVP analysis to understand how costs and profits change with changes in volume or level of activity.

The following information is available about the two products Standard and Deluxe.

	Standard	Deluxe	Total
Units Sold	300,000	100,000
Selling Price per unit (OMR) ( Choose between)	24	33
Variable costs per unit (OMR)	14	18
Fixed costs (OMR)			1,800,000
Budgeted units	320,000	170,000
Target profit (OMR)	300,000	500,000

Required:

1. Calculate the breakeven points in units:                                                                          10 Marks

1. If only Standard products are sold
2. If only Deluxe products are sold

2. Calculate the breakeven points in Revenue:                                                                    12 Marks

1. If only standard products are sold
2. If only deluxe products are sold

(c)    How many units need to be sold to achieve a target profit if only standard products are sold?                                                                                                                                                   5 Marks

(d)     What do you understand by margin of safety? Briefly explain different steps which can be used to improve margin of safety.                                                                                                 3 3 Marks

Answer 1

a)
	i) only standard products	ii) only deluxe products
Fixed costs	18,00,000	18,00,000
S.P	24	33
V.cost per unit	14	18
Contribution per unit	10	15
Breakeven units	1,80,000	1,20,000
Fixed costs / contribution margin
b)
	i) only standard products	ii) only deluxe products
Fixed costs	18,00,000	18,00,000
S.P	24	33
V.cost per unit	14	18
Contribution per unit	10	15
Breakeven units	1,80,000	1,20,000
Fixed costs / contribution margin
S.P	24	33
Breakeven sales	43,20,000	39,60,000

c)
	only standard products
Fixed costs	18,00,000
Target profits	8,00,000
Total contribution margin reqd	26,00,000
S.P	24
V.cost per unit	14
Contribution per unit	10
No of units reqd to be sold	2,60,000
Total cont margin reqd / contribution margin per unit

d)

Margin of safety is extra sales above break even sales

Increase sales volume

Decrease S.P so volume gets increased

Reduce Fixed costs

Reduce variable cost per unit

Please Like the solution if satisfied with the answer and if any query please mention it in comments...thanks