Question

uestion 1 – Breakeven Chart with Increases in Fixed Costs

(a)     Identify and discuss briefly five assumptions underlying cost-volume-profit analysis.

                                                                                                                                      

(b)     A local authority, whose area include a holiday resort situated on the east coast, operates, for 30 weeks each year, a holiday home which is let to visiting parties of children in care from other authorities. The children are accompanied by their own house mothers who supervise them throughout their holiday. From six to fifteen guests are accepted on terms of £100 per person per week. No differential charges exist for adults and children.

Weekly costs incurred by the host authority are:

	£ per guest
Food	25
Electricity for heating and cooking	3
Domestic (laundry, cleaning, etc.) expenses	5
Use of minibus	10

Seasonal staff supervise and carry out the necessary duties at the home at a cost of £11,000 for the 30-week period. This provides staffing sufficient for six to ten guests per week but if eleven or more guests are to be accommodated, additional staff at a total cost of £200 per week are engaged for the whole of the 30-week period.

Rent, including rates for the property, is £4,000 per annum and the garden of the home is maintained by the council’s recreation department which charges a nominal fee of £1,000 per annum.

Required:

(i)      Tabulate the appropriate figures in such a way as to show the break-even point(s) and to comment on your figures.                                                                                           

(ii)        Draw, on the graph paper provided, a chart to illustrate your answer to (b)(i) above.

Answer 1

Cost Volume Profit Analyses is a point where total revenue becomes equal to the total cost of given project.It is basically the Break even point i.e.company will face no profit no loss situation. Following are the assumptions underlying CVP analyses:

1.There are only two types of cost i.e either fixed cost or variable cost.

2.Cost is only effected by change in activity.

3.All units that are being produced are sold leaving no inventories behind.

4.The ratio of each product to total sales is constant in case where more than one product is produced by company.

5.The behaviour of both costs and the revenue are throughout relevant range of activity.

b(i) Total Fixed Cost=11000+200+4000+1000=16200

Variable Cost=25+3+5+10=43

Break Even Point=16200/(100-43)=285guests

Calculation of break even point by the business owners is the key financial analyses tool.It is useful to both small and big businesses as it can calculate the no.of units which should be produced or sold necessarily for survival.