Question

Q 3   Ibrahim Corporation produces and sells a product A with a price of $30 per unit and variable costs of $12 per unit. Total fixed costs are $7,000.

a.   Calculate Ibrahim Compagny’s contribution margin per unit.

b.   How many units must Ibrahim Compagny sell to break even?

c. You are manager in Ibrahim Corporation. Explain what assumptions and limitations you should consider when using CVP analysis?

plz don't put the answer in photos

Answer 1

Answer a

Compagny’s contribution margin per unit = Selling Price - Variable cost = $30 - $12 = $18 per unit

Answer b

Break even in units = Fixed Cost / Contribution margin per unit = $7,000 / $18 = 389 units

Answer c

Assumptions and limitations to consider when using CVP analysis

• Under CVP analysis , all cost needs to be seperated between fixed cost & variable cost . Where as in real life it very difficult to divide each & every cost element into fixed & variable
• Under CVP analysis , it is assumed that the cost behaviour will remain unchanged . ie fixed cost not to change in short term & variable cost is always at a same proportion of sales every time which may not be the case in real life scenario.
• Under CVP analysis , the selling price per unit to remain constant but in reality the selling price do changes due to factors like discounts .
• CVP analysis is a tool uses more for short term decision making as nothing remains constanct in long term horizon.
• Thus due to many such assumptions as mentioned above CVP analysis lacks exact accuracy & thus cannot be wholely be trusted for decision making purpose.