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Compiled by target 0546738172 / 0507380935

Questions on Break-even or Cost Volume Profit (CVP) analysis

Question 1
Agro Beso plan to sell 150,000 units of its product at GHS20 per unit. Material
cost is GHS 2per unit and other variable costs are GHS13 per unit
(manufacturing cost of GHS10 and selling expenses of GHS3). Fixed cost are
incurred uniformly throughout the year and amount to GHS972,000
(manufacturing cost of GHS600,000 and selling expenses of GHS 372,000)
a) Calculate the break-even point in units and cedi
b) Calculate the number of units that must be sold to earn an income of
GHS75,000 before income tax
c) Calculate the number of units that must be sold to earn an after profit of
GHS100,000 if the income tax rate is 40%
d) Prepare the budgeted income statement if the selling price and material cost per
unit increased by 12% whiles the plan sales unit also increased by 6%
Question 2
I am done Ltd a manufacturing organization, has a budgeted profit
statement for its next financial year, when it is expected to be operating at
75% level of capacity

The budget is given below

GH¢ GH¢
Sales 9,000 units at GH¢ 32 288,000
Less Direct materials 54,000
Direct wages 72,000
Production overheads: fixed 42,000
Variable 18,000 186,000
Gross profit 102,000
Less: Administration, selling & distribution
cost: fixed 36,000
Variable 27,000 63,000
Net profit 39,00

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Required
Calculate the following

a) The break-even point in units and in value

b) The contribution to sales ratio
c) The number of unit that must be sold to earned a profit of GH¢
52,000
d) Prepare the budgeted income statement if the company operate full
capacity
e) Explain two usefulness and two limitations of breakeven analysis
f) Prepare the budgeted income statement if the selling price and material cost per
unit increased by 12% whiles the plan sales unit also increased by 6% (try
this)

Question 3
Braha Beda Hotels is a company in the hospitality industry that takes care of
travelers along its area of operation.
The budgets for the Hotel for the 2010 are as follows
GHS GHS
Occupants charges 1,100,000
Costs: variable
Direct supplies 80,000
Direct salaries 600,000
Occupants:
Overheads 65,000
Administration 92,000
Fixed :
Overheads 125,000
Administration 140,000 (1,102,000)
Loss for the period (2,000)

Additional information
1. Number of rooms available 100 per day

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2. Occupants per day 24,000 per annum

You are required to compute:
i) The contribution margin ratio
ii) Break-even point both occupants days and occupants charges
iii) Margin of safety ratio if the Hotels operates at full capacity and prepare the
income statement.
iv) The profit statement if the occupant charges increase by 10%
v) The break-even point in occupant days if direct salaries were to increase to
GHS626,000
vi) The break-even point in occupants days if fixed occupants service
overheads were increased to GHS145,000
vii) The profit statement if the occupant days increase by 10% (try this)

Question 4

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Question 5
(a) State any four (4) assumptions and limitations of cost-volume-profit analysis in short term
decisions making.
(4 marks)

Question 6
Ababio Plastic Company produces plastic buckets which are distributed all over the
country. During the years 2009 and 2010, the following data were extracted:

Sales (GHC) Profits (GHC)

Year 2009 1,200,000 80,000
Year 2010 1,400,000 130,000
.
You are required to calculate the following:
i. Profit –Volume Ratio (P/V Ratio)
ii. Break – Even Point in Sales value
iii. Profit when the sales value is GHC1,800,000
iv. The Sales Value required to make a profit of GHC120,000
v. The Margin of Safety in the Year 2010
(10 marks)

a. State three (3) uses of the Cost- Volume- Profit (CVP) Analysis. (3marks)

b) The market price of both fowls and guinea fowls have dropped as a result of low demand to
GH₵15 and GH₵10 respectively.

AB Farms located at Kasoa produces 60% of fowls and 40% of guinea fowls on her
farms incurring GH₵9 and GH₵8 as variable cost per bird respectively.

The following fixed costs are incurred annually:

GH₵
Staff Cost 48,000

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Rent 12,000
Electricity 6,000
Depreciation 8,000
Other Overheads 2,000

Required:

(i) Calculate the number of fowls and guinea fowls to be produced to break-even.
(5 marks)

(ii) If the profit target is GH₵25,000, how many birds should be produced to meet this
target? (3 marks)

a) For any cost volume profit analysis to be valid, a number of important assumptions
must reasonably be satisfied within the relevant range. As a management
accountant for your organisation, evaluate any four assumptions that must be
satisfied in cost-volume-profit analysis. (4 marks)

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 b) Anta Limited manufactures and sells Motor King to customers dividend into High
Quality, Medium Quality and Low Quality motor Kings and categories below:

Sales Price Involved Cost Commission

on Sales
GH¢ GH¢ GH¢
High quality 3,400 1,200 80
Medium quality 2,300 1,080 60
Low quality 1,700 690 40

It is on record that sale quantities of Low Quality Motor King is twice compared to
Medium and High Quality Moto Kings. Annual fixed cost of GH¢310,000 is
expected to be incurred.

You are required to:

i. Compute the sales mix. (1 mark)
ii. Compute the unit contribution margin for each brand of Motor King. (4 marks)
iii. Compute the weighted average unit contribution. (4 marks)
iv. Compute break even sales in volume and in sales. (4 marks)
v. How many motor kings should be sold to earn target profit of GH¢15,000?
(3 marks)
(Total=20 marks)

QUESTION FOUR

Zumah Ltd manufactures and sells two complimentary products: Hyline and Glycerin in the
ratio 3:2. The result for the just ended period showed the following:

Product Hyline Glycerin

Selling price (GH¢) 20 15
Contribution/sales ratio 60 40
 Profit/ (loss) (GH¢) 97,200 (3,600)

Joint fixed cost of GH¢180,000 are apportioned in proportion to the number of units of each
product sold.

The company is in the process of preparing the budget for the coming year, and is desirous
of improving the performance of Glycerin. Therefore the following proposals are being
considered for implementation:
i) Increase the price of Glycerin by 25% in expectation that the quantity demanded will
reduce by 10%; or
ii) Retool the production process which will result in a reduction of joint fixed costs by 15%
and an increase in variable costs of each product by 10%; or
iii) Introduce proposals 1 and 2.

Required:
a) Determine the units of each product sold, and hence, prepare the profit statement for the
just ended period; and (7
marks)
b) Advise the management of Zumah Ltd as to which proposal to implement with the view of
optimizing profits. (8
marks)
(Total: 15 marks)

QUESTION FOUR

Boasiako Ltd manufactures high quality coffee biscuits that are sold to hotels and restaurants
in Koforidua. Two months ago it had prepared a budget for the forthcoming financial year.

Details of the budget is presented below:

GH¢
Sales 6,000,000
Less:
Direct materials 2,080,000
Direct labour 1,160,000
Variable overheads 840,000
Fixed overheads 972,600
Total costs 5,052,600
Profit 947,400

The budget above has been prepared on the assumption that sales will be 800,000 packets
of biscuits. However, due to changing economic conditions, the sales forecast for the year
is now 720,000 packets of biscuits. It is expected that selling price per unit, direct costs per
unit and variable overhead cost per unit will not change from those budgeted. It is also
expected that fixed overheads will be the same as those budgeted.
 Management is now considering a number of options so as to improve profitability for the
forthcoming financial year:

Option 1:
Decrease the selling price by 20%. It is anticipated that this would increase sales volume
by 25% on the forecast sales for the current year.

Option 2:
Decrease all variable costs by 10% and decrease fixed costs by 10%. This is not expected
to have any impact on the sales level.

Option 3:
Decrease the selling price by 10% and decrease fixed costs by 5%. This is expected to
increase sales volume by 25% on the forecast sales for the current year.

Required:
a) Calculate the expected profit for the current year (forecast sales). (2 marks)
b) Based on the forecast activity for the year, calculate:
i) The breakeven point in packets of biscuits.
ii) The margin of safety in percentage terms.
iii) The sales revenue required to earn a profit of GH¢1,440,000. (6 marks)

c) Evaluate the profitability of the three options and recommend the option that Boasiako Ltd
should adopt. (7 marks)

(Total: 15 marks)

QUESTION FIVE

Graphix Communication Group Limited (GCGL) is a magazine publishing company. It

comprises a number of different divisions, each publishing magazines in a different sector.
GCGL is now considering publishing Financial Magazine. The Financial Magazine market
is very competitive with a number of well-established titles already being published by
GCGL’s competitors.
Financial Magazine is a monthly magazine.

GCGL has therefore commissioned an advertising campaign to launch its Financial

Magazine. The price of the Financial Magazine has been set at full cost plus a mark-up of
20%.

Forecast variable cost per copy of the Financial Magazine:

GH¢
 Paper 0.83
Ink See note (i)
Machine cost 0.22
Other variable cost 0.15

The following additional information is available:

i) Each Financial Magazine needs 0.2 litres of ink. However, 10% of the ink input to the
printing process is wasted. Ink costs GH¢5.40 per litre.
ii) In month 1, GCGL expects to sell 50,000 copies of the magazine to new customers at this
price.
iii) After their first month of sales, GCGL expects 90% of first month’s customers to purchase
the Financial Magazine in month 2. After the second month of purchase, GCGL expects to
retain 85% of month 2 customers in subsequent months.
iv) As the magazine circulation area increases, sales to additional new customers in month 2
will be 20% of month 1 sales figure. 90% of this would be retained in month 3.
v) Sales to additional new customers in month 3 would be 30% of month 1 sales figures
vi) Fixed overhead costs are apportioned by GCGL to the Financial Magazines based on first
month sales volume. Total budgeted annual fixed overhead is GH¢18,000,000 and total
budgeted annual magazine sales, including the Financial Magazine, is 12,000,000 copies.
vii) The sales price of the Financial Magazine will remain unchanged throughout the first three
months.

Required:
a) Discuss TWO (2) advantages and TWO (2) disadvantages of the managing director's pricing
strategy in the circumstances described above. (4 marks)

b) Produce a statement that shows the total profit for the first three months of Financial
Magazine. (10 marks)

c) Calculate the number of copies of the Financial Magazine that need to be sold to achieve a
profit of GH¢100,000. (6 marks)

(Total: 20 marks)