ACCA107

CVP Analysis
Ex 9.1 to 9.3
Answers

Ex 9.1
a) percentage
SP 70 100%
DM 28
DL 12
Variable OH 8 48
CM 22 31.43%

BE = FC/CM
BE = 34,000/22
1545.454545
- 1,545- units

BE = FC/CM%
BE = 34,000/31.43%
- 108,177- $

b)

X = (FC + PBT) / CM%

X=( 34,000 + 40,000) / 31.43%
X = 74,000/31.43%
- 235,444-

(235,444/70)
- 3,363-

OR

X = (FC + PBT) / CM
X = (34,000 + 40,000) / 22
X = 74,000 / 22
- 3,364-

c)

PAT - 40,000-
PBT = PAT / ( 1 - tax rate)
PBT = 40,000 / (1 - 0.4)
PBT = 40,000/0.6
- 66,667-

X = 34,000 + 66,667 / 31.43%

X = 100,667 / 31.43%
- 320,290-

(320,290/70)
- 4,576-

d)
PuAT = 20% of Revenue
PuAT = 20% x 70
14

PuBT = PuAT/ (1 - tax rate)

PuBT = 14/ (1 - 0.4)
PuBT = 14/ (0.6)
23

X = FC / adjusted CM%

percentage
SP 70 100%
less:
DM 28 40%
DL 12 17%
OH 8 11%

CM 22 31%

CM is only 22 while the desired PuBT is 23. No amount of sales will realize this.
In terms of rate, the CM ratio is only 31% while the desired pre-tax rate is higher at 33%.

e)
Reduction in Variable cost ($6 x 5,000) - 30,000-
increase in fixed cost - 40,000-
net loss - 10,000-
 The company should not make the investment because it will result to a net loss of 10,000.

f)

Current CM 22

Proposed CM
SP (70 x 90%) 63
VC 48
CM 15

Proposed total CM 15 x (3,000 x 1.3) - 58,500-

Current Total CM (22 x 3,000) - 66,000-
Decrease in CM - 7,500-
less: Increase in cost - 10,000-
Decrease in profit before tax - 17,500-

NO, the changes should not be made.

It will result to a decrease in profit before tax of 17,500

Ex 9.2
a)
$ %
SP 6.5 100.00%
less: Variable cost 4 61.54%
CM 2.5 38.46%

Variable costs
DM 2
DL 1.25
Var OH 0.5
Var selling 0.25
Total variable costs 4

b)
BE = FC/CM
BE = 1,250,000/2.5
- 500,000- units

c)
BE = FC/CM%
BE = 1,250,000/38.46%
- 3,250,130-

d)
X = (FC + PBT) / CM
X = (1,250,000 + 1,096,000)/2.5
X= 2,346,000/2.5
- 938,400-

e)
PAT = $750,000
PBT = PAT / (1 - tax rate)
PBT = $750,000/ ( 1 - 0.4)
PBT = $750,000/ 0.6
- 1,250,000-

X = (FC + PBT) / CM
X = ($1,250,000 + $1,250,000)/2.5
X= $2,500,000/2.5
- 1,000,000-

f)
BE = FC/CM
BE = 1,300,000/2.5
- 520,000-

g)

Revenue (20,000 x $4.4)

Variable cost 4
Increase in variable cost 0.2
New Variable cost 4.2

Increase in Revenue - 88,000- ($4.4 x 20,000)

less:
Increase in variable cost - 84,000- ($4.2 x 20,000)
Increase in fixed cost - 6,000- - 90,000-
Net loss - 2,000-

The company should not take the offer since it will result to net loss of $2,000.
Ex 9.3
a)
$ %
SP 60 100%
less: Variable cost 45 75%
CM 15 25%

Variable costs
Variable manufacturing 35
Variable selling 10
Total variable cost 45

b)
BE = FC/CM
BE = $975,000/15
- 65,000- units

c)
X = (FC + PBT) / CM
X = ($975,000 + $900,000)/15
X= $1,875,000/15
- 125,000- units

d)
PAT = $750,000
PBT = PAT / (1 - tax rate)
PBT = $750,000/ ( 1 - 0.4)
PBT = $750,000/ 0.6
- 1,250,000-

X = (FC + PBT) / CM
X = ($975,000 + $1,250,000)/15
X= $2,225,000/15
- 148,333- units

e)
New CM
SP 60
less:
Variable mfg-labor (0.6 x 35 x 0.9) 18.9
Variable mfg-others (0.4 x 35) 14
Variable selling 10 42.9
New CM 17.1

FC -labor - 351,000- (0.4 x $975,000 x 0.9)

FC - others - 585,000- (0.6X $975,000)
New FC - 936,000-

BE = FC/CM
BE = $936,000/17.1
- 54,737- units

original breakeven point - 65,000-

new breakeven point - 54,737-
decrease in units - 10,263-

There will be a decrease in the breakeven point by 10,263 units.

f)
Number of units to be sold - 150,000- (600,000 x 25%)

Sales - 9,000,000- ($60 x 150,000)

VC - ? - 6,675,000- ($9,000,000-$2,325,000)
CM - 2,325,000- ($1,350,000+$975,000)
FC - 975,000-
PBT - 1,350,000-

VC per unit - 44.50- ($6,675,000/150,000)

Original Variable cost - 45.00-

New variable cost - 44.50-
Reduction in variable cost - 0.50-

Variable cost should be reduced by $0.50.

END
 after-tax rate 20%

convert to pre-tax rate

pre-tax rate = after=tax rate / ( 1 - tax rate)
pre-tax rate = 0.2/( 1 -0.4)
pre-tax rate = 0.2/ 0.6
33%

is higher at 33%.
net loss of 10,000.
($4.4 x 20,000)

($4.2 x 20,000)