Question

In: Accounting

Question 2                                        &nbsp

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

  1. 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

Solutions

Expert Solution

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


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