DMS 4033 – Managerial Accounting

CVP Analysis - Solution

Question 1

Jak Boeno Sports manufactures and sells world class recreational equipment. One of the
company’s products, a small camp stove, sells for RM 75 per unit. Variable expenses are RM
45 per stove, and fixed expenses associated with the stove total RM 180,000 per month.

Required:
a) Show computation of the break-even point in number of stoves and in total sales in
Ringgit Malaysia.

BEP in unit = Fixed expense/unit contribution margin

= RM180,0000
RM75-RM45
= 6,000 units

BEP in Ringgit Malaysia = 6,000 unit x RM75

= RM450,000

b) If the variable expenses per stove increase as a percentage of selling price, will it result
in a higher or lower break-even point? Why? (Assume that the fixed expenses remain
unchanged.)
 Result in higher break-even-point
 Because – CM will decrease as percentage of sales
- more have to be sold

c) At present, the company is selling 7,000 stoves per month. The sales manager is
convinced that a 5% reduction in the selling price would result in a 15% increase in
monthly sales of stoves. Prepare two contribution income statements, one under present
operating conditions, and one as operation would appear after the proposed changes.
Show both total and per unit data on your statements.

Present : Proposed :
7,000 stoves 8,050 stoves
Total Per unit Total Per unit
Sales RM 525,000 RM 75 RM RM 71.25
573,562.50
Less : Variable expenses 315,000 45 362,250 45
Contribution margin 210,00 RM 211,312.5
0 0
Less : Fixed expenses 180,000 180,000
Net income RM 30,000
R
M
3
1,
3

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2.
5
0

d) Refer to the data in (c) above. How many stoves would have to be sold at the new
selling price to yield a net minimum income of RM 40,000 per month?

Unit to sold to obtain targeted profit = Fixed cost + desired profit

CM per unit
= RM 180,000 +40,000
RM26.25
= 8,381 units

Question 2

Birdy Company’ makes high quality wooden birdhouse, called Chiki Lala. The Birdy
Company’s 2012 forecast are to sell 45,000 units of a product it makes for RM11.25 million
in revenue. Variable manufacturing cost per unit is RM125 where as variable selling expenses
per unit is RM30. The company’s fixed manufacturing cost per unit is RM50, based on a
normal volume of 50,000 units. Fixed selling expenses for the year are estimated to be
RM350,000.

Required:

a) Calculate the break-even sales in unit and Ringgit Malaysia.

BEP in unit = Fixed expense/unit contribution margin

= (RM 50 x 50,000)+ RM350,000

(RM11,250,000/45,000)-RM125

= RM2,850,000
250-125
= 22,800 units.

BEP in ringgit Malaysia = 22,800 x RM250 = RM5,700,000

b) A cost-saving machine can be purchased. It will add RM200,000 to the fixed

manufacturing costs. The machine will lead to a RM5 reduction in variable
manufacturing costs per unit. However, because of the poor economy, the product has to
be promoted more intensively and the promotion budget will have to increase by
RM25,000.

Calculate the sales revenue (BEP in RM) required to be maintained if the new cost
structure is put in place after purchasing the new cost-saving machine.

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 BEP in unit = Fixed expense/unit contribution margin

= RM2,850,000 + RM200,000 + RM25,000

RM250 – (RM125-RM5)

= RM3,075,000
120
= 25,625 units.

BEP in ringgit Malaysia = 25,625 x RM250 = RM6,406,250

Question 3

Mikasa Company manufactures volleyballs. The company has a ball that sells for RM25. At
present, the ball is manufactured in a small plant that relies heavily on direct labour workers.
Thus variable cost are high, totaling RM15 per ball, of which 60% is direct labor cost.

Last year company sold 30,000 of these balls, with the following result.

Sales (30,000 balls) RM750,000

Variable expenses 450,000
Contribution margin 300,000
Fixed expenses 210,000
Net operating income 90,000

Required:
a) Calculate the contribution margin ratio and the break-even sales in balls.
Selling price................................... 25 100%
Variable expenses.......................... 15 60%
Contribution margin...................... 10 40%

BEP in unit = Fixed expense/unit contribution margin

= RM210,000
RM10
= 21,000 balls
b) Due to an increase in labour rates, the company estimates that variable costs will increase
by RM3 per ball next year. If this change takes place and the selling price per ball remains
constants at RM25, what will the new contribution margin ratio and the break-even sales
in balls?
Selling price................................... 25 100%
Variable expenses…(RM15 +
RM3) 18 72%
Contribution margin...................... 7 28%

BEP in unit = Fixed expense/unit contribution margin

= RM210,000
RM7
= 30,000 balls

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c) Refer to the data in (b) above.
i) If the expected change in variable costs takes place, how many balls will have to be
sold next year to earn the same net operating income as last year?
Unit to sold to obtain targeted profit = Fixed cost + desired profit
CM per unit
= RM 210,000 +90,000
RM7
= 42,857 units

ii) The president fells that the company must raise the selling price of its volleyballs. If
the company wants to maintain the same contribution margin ratio as last year, what
selling price per ball must it charge next year to cover the increased labour cost?

The contribution margin ratio last year was 40%. If we let P equal the new selling
price, then:

P= RM18 + 0.40P
0.60P = RM18
P= RM18 ÷ 0.60
P= RM30

To verify:
RM3
Selling price................................. 0 100%
Variable expenses........................ 18 60%
RM1
Contribution margin.................... 2 40%

Therefore, to maintain a 40% CM ratio, a RM3 increase in variable costs would

require a RM5 (RM30-RM25) increase in the selling price.

d) Refer original data.

The company is discussing the construction of a new automated manufacturing plant. The
new plant would slash variable cost per ball by 40%, but it would cause fixed costs per
year to double. If the new plant is built, what would be the company’s new contribution
margin ratio and the break-even sales in balls?

Selling price................................... 25 100%

Variable expenses…(RM15 x
0.6) 9 36%
Contribution margin...................... 16 64%

BEP in unit = Fixed expense/unit contribution margin

= RM210,000 x 2
RM16
= 26,250 ball

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