1. Why is it important for management to understand cost volume-profit relationships?

 Cost-volume-profit analysis determines how changing the costs and sales levels will
affect the company's profits. Businesses use CVP to understand if manufacturing a
product is economically viable. The contribution margin is the difference between your
company's sales revenue estimates.

 As a starting point in profit planning, it helps to determine the maximum sales volume to
avoid losses, and the sales volume at which the profit goal of the firm will be achieved.
As an ultimate objective it helps management to find the most profitable combination of
costs and volume.

 Evaluate the implications of its short run decisions about fixed costs, marginal costs,
sales volume and selling price for its profit plans on a continuous basis.

 Help companies determine their contribution margin, which is the amount remaining
from sales revenue after all variable expenses have been deducted. The amount that
remains is first used to cover fixed costs, and whatever remains afterward is considered
profit.

2. What is an activity base and why is it important in analysing cost behaviour?

 Activity base refers to the concept of ABC or activity base costing, which is a way that
organizations measure the cost of human and capital resources in comparison to the
amount of production achieved. In order for an organization to control the costs
associated with doing business when producing goods and services, a system to measure
all resources must be in place. Therefore, the activity base is the point at which the
company documents the profitability of this careful balance between resources and
revenues.
 The activity base methodology has typically been used to make strategic decisions
concerning the addition of staff, equipment and more resources by which to perform
more services or produce more goods. By adding more products and services, or
increasing labor, an organization can generally expect to reach higher levels of
profitability. The more profitable an organization is, the higher the ABC level becomes,
which is a measurement of the organizational growth.

 Cost behavior analysis refers to management’s attempt to understand how operating costs
change in relation to a change in an organization’s level of activity. These costs may
include direct materials, direct labor, and overhead costs that are incurred from
developing a product. Management typically performs cost behavior analysis through
mathematical cost functions.

 Knowing how costs behave and why they change is an important component to analyzing
pricing, reducing costs and managing expenses. There are a variety of costs that go into
the production of a product or the performance of a service.
Problem 17.2 A

Answer

Purchase of raw material

a) Raw material inventors...........................59,700

Account payable.............................59,700

Issue Raw materials

b) Work in process.................................................................................................................56,200

Raw materials.........................................................................................................56,200

C) Work in process.................................................................................................................30,000

Salary and wage payable..........................................................................................26,300

d) Work in process..................................................................................................................34,900

Manufacturing overheated........................................................................................34,900

Cost Good sold

e) Manufacture overheated...................................................................................................34,900

Account payable.........................................................................................................34900

f) Work in process ....................................................................................................................18

Manufacture ring overhead...........................................................................................18

g) Finished Goods.................................................................................................................116,000

Work in
process..........................................................................................................116,000

h) Account
payable................................................................................................................210,000

Sales.....................................................................................................................210,000
Problem 20.1A

a) Projected Unit Sales =

 60,000 =

 Contribution Margin per Unit =

 UCM= 25

Unit Selling Price= unit Contribution Margin + Variable Cost per Unit

 Unit Selling Price=25+50=75

 USP=75

OR

 Net Income=Selling Price Unit(Q)- Variable cost per unit(Q)-Fixed Cost

 USP=

 USP=

 USP=75
b) AT BREAK EVEN OUR NET INCOME IS 0.

HENCE,

 Net Income=Selling Price Unit(Q)- Variable cost unit(Q)-Fixed Cost

 0=USP (Q)-VCPU (Q)-FC

 Q=

 Q= = 32,000

 Ionic charge must produce and sell 32,000 units to break even

c) MARGIN OF SEFTY = SALES - BREAK EVEN

Calculating margin of safety in units:

 BEP(IN UNITS) = 32,000

 SALES IN VOLUME IN UNITS =

= = 60,000

 MOS = SALES – BEP = 60,000 – 32,000

 MOS= 28,000 (MARGIN OF SAFETY IN UNITS)

Calculating margin of safety in Dollar:

 BEP(DOLLAR)= , BUT CMR= = = 0.333333

  BEP(DOLLAR) = = 2,402,402.4

 SALES IN VOLUME(IN DOLLAR)= =

= 4,504,504,5

Finally,

 MOS= 4,504,504,5 - 2,402,402.4

 MOS = 2,102,102.1 (MARGIN OF SAFETY IN DOLLAR)

d) USP= $60, Q=60,000 UNITS

 Net Income=Selling Price Unit(Q)- Variable cost unit(Q)-Fixed Cost

 0=USP (Q)-VCPU (Q)-FC

 Q=

 Q= = 80,000

To break even ionic charge must produce and sell 80,000, but it is producing 60,000 so no it
can’t break even at $60

Problem 20.2 A
Answer:
a) USP = =

USP= $105

Or

We can use another method:

 Sales volume = (Fixed costs + Target income) / Contribution margin per unit

 Fixed costs = (Percentage of fixed Selling and Admin expenses) +  

 Percentage of fixed Manufacturing expenses

     = 600,000 * 80% + 720,000 * 75%

     = 480,000 + 540,000

     = $1,020,000

 30,000 units = (1,020,000 + 900,000) / Contribution Margin per unit

 Contribution margin per unit = 1,920,000/30,000

= $64

 Sales per unit = Contribution margin per unit  + Variable cost per unit

 Variable Cost per unit = 21 + 10 + (24*25%) + (20 * 20%)

      = $41

 Sales per unit = 64 + 41

= $105 per unit

b) 1. Fixed costs = (Percentage of fixed Selling and Admin expenses) + Percentage of fixed

Manufacturing expenses

= 600,000 * 80% + 720,000 * 75%

 = 480,000 + 540,000

= $1,020,000

2. Variable Cost per unit

= Direct materials + Direct Labour + variable percentage of manufacturing overhead cost

per unit + variable percentage of Selling and administrative per unit

= 21 + 10 + (24*25%) + (20 * 20%)

= $41

3. Contribution margin = Selling price - Variable cost

= 121 - 41

= $80

4. Breakeven Point = Fixed Cost / Contribution margin

= 1,020,000/80

= 12,750 units