SPJIMR|PGPM|MANAGEMENT ACCOUNTING|2023

Topic: CVP Analysis

1. The Reynolds Company manufactures and sells pens. Currently 6,00,000 units are sold per
year at Rs. 10 per unit. Fixed costs are Rs. 15,00,000 per year. Variable costs are Rs. 6 per unit.
Consider each case separately:
i. What is the present operating income for a year and what is the present breakeven point in
revenue?
ii. Compute the new operating income for each of the following changes.
a. A Re. 0.50 per unit increase in variable costs.
b. A 10% increase in fixed costs and a 10% increase in units sold.
c. A 20% decrease in fixed costs, a 20% decrease in selling price, a 10% decrease in
variable cost per unit and a 40% increase in units sold.
d. A 15% increase in fixed costs.
e. A 10% increase in selling price and Rs. 1,00,000 increase in fixed costs.

2. Big Jos clothing’s revenues and cost data for 2019 appear below:
Revenues Rs. 10,00,000
Cost of goods sold ( 40%) 4,00,000
Gross margin 6,00,000
Operating Costs
Salaries Rs. 3,00,000
Sales commission ( 10%) 1,00,000
Depreciation 24,000
Store Rent ( Rs. 8,000 p.m.) 96,000
Other Operating Costs 1,00,000 (6,20,000)
Operating Loss (20,000)
Mr. Nitin, the owner of the store is unhappy with the operating results. An analysis of other
operating costs reveals that it includes Rs. 80,000 variable costs, which vary with sales volume and
Rs. 20,000 fixed costs.
a. Compute the contribution margin of Big Jos Clothing.
b. Compute the contribution margin %age
c. Mr. Nitin, estimates he can increase revenues by 20% by incurring additional advertising cost
of Rs. 20,000. Calculate the impact on operating income.

3. Vardhman Spinning is considering three countries for the sole manufacturing site of its new
sweater: Singapore, Thailand and United States. All sweaters are to be sold to retail outlets in the
United States at Rs. 32 per unit. These retail outlets add their own markup when selling to final
customers. The three countries differ in their fixed and variable cost per sweater.

Country Annual Fixed Costs Variable Manufacturing Variable Marketing and

Cost per Sweater Distribution Cost per Sweater
Singapore Rs. 6.5 Million Rs. 8.00 Rs. 11.00
Thailand 4.5 Million 5.50 11.50
United States 12 Million 13.00 9.00

1|SM
 SPJIMR|PGPM|MANAGEMENT ACCOUNTING|2023
i) Compute the breakeven point of Vardhman Spinning in units sold for each country and
revenues for each country. ii) If Vardhman sells 8,00,000 sweaters in each country for the current
year, what is the budgeted operating income, for each country? Comment on the result.
4. Thomas cook India generates average revenue of Rs. 20,000 per person on its five day
package tours to Goa. The variable costs per person are as follows:

Airfare Rs. 5,000

Hotel Accommodation 2,000
Meals 3,000
Ground transportation 3,000
Park tickets and other costs 1,000
Total Rs. 14,000
Annual Fixed Costs Rs. 18,00,000
a. Calculate the number of package tours that must be sold to breakeven.
b. Calculate the revenue needed to earn a target operating income of Rs. 6,00,000
c. If fixed costs increase by Rs. 3,00,000 what decrease in variable costs must be achieved to
maintain the breakeven point calculated in requirement ‘a’ above?

5. Birla Company manufactures and sells adjustable canopies that attach to motor homes and
trailers. For its current year budget, Birla estimated the following:

Selling price Rs. 20,000

Variable cost per canopy 10,000
Annual Fixed costs 50,00,000
Net Income 1,20,00,000
Income Tax rate 40%
The May financial statements reported that sales were not meeting expectations. For the first five
months of the year, only 350 units had been sold at the established price, with variable costs as
planned, and it was clear that the net income projection for current year would not be reached unless
some actions were taken. A management committee presented the following mutually exclusive
alternatives to the president.
a. Reduce the selling price by Rs. 2,000. The sales organization forecasts that at this
significantly reduced price, 2,700 units can be sold during the remainder of the year. Total
fixed costs and variable cost per unit will stay as budgeted.
b. Lower variable cost per unit by Rs. 500 through the use of less expensive direct materials and
slightly modified manufacturing techniques. The selling price will also be reduced by Rs.
1,500 and sales of 2,200 units are expected for the remainder of the year.
c. Reduce fixed costs by Rs. 5,00,000 and lower the selling price by 10%. Variable cost per
unit will be unchanged. Sales of 2,000 units are expected for the remainder of the year.
i. If no changes are made to the selling price or cost structure, determine the number of units
that Birla Company must sell to break even and to achieve its net income objective.
ii. Determine which alternative Birla should select to achieve its net income objective. Show
your calculations.

6. The VIP company retails 2 products, a standard and a deluxe version of a luggage carrier.
The budgeted income statement for next period is as follows:

2|SM
SPJIMR|PGPM|MANAGEMENT ACCOUNTING|2023
Particulars Standard Carrier Deluxe Carrier Total
Units sold 1,50,000 50,000 2,00,000
Revenues at Rs. 1,000 and Rs. 1,500 per unit 15,00,00,000 7,50,00,000 22,50,00,000
Variable costs at Rs.700 and Rs.900 per unit 10,50,00,000 4,50,00,000 15,00,00,000
Contribution margins at Rs. 300 and Rs. 600 4,50,00,000 3,00,00,000 7,50,00,000
per unit
Fixed Costs 6,00,00,000
Operating Income 1,50,00,000
i. Compute the break-even point in units assuming that the planned sales mix is attained.
ii. Compute the break-even point in units (a) if only standard carriers are sold and (b) if only
deluxe carriers are sold.
iii. Suppose 2,00,000 units are sold but only 20,000 of them are deluxe. Compute the operating
income. Compute the breakeven point in units. Compare your answer with the answer to
requirement i. What is the major lesson of this problem?

7. The Jindal company is considering two new colours for their umbrella products: emerald
green and shocking pink. Either can be produced using present facilities. Each product requires an
increase in annual fixed costs of Rs. 40,00,000. The products have the same Rs. 100 selling price
and the same Rs. 80 variable cost per unit. Management, after studying past experience with similar
products, has prepared the following probability distribution:
Even ( Units Demanded) Probability for Emerald Green Umbrella Probability for Pink Umbrella
50,000 0.0 0.1
1,00,000 0.1 0.1
2,00,000 0.2 0.1
3,00,000 0.4 0.2
4,00,000 0.2 0.4
5,00,000 0.1 0.1
i. What is the breakeven point units for each product?
ii. Which product should be chosen, assuming the objective is to maximize expected operating
income? Why? Show your computations.
iii. Suppose management is absolutely certain that 3,00,000 units of shocking pink will be sold
but it still faces the same uncertainty about the demand for emerald green as outlined in the
problem. Which product should be chosen? Why? What benefits are available to
management from having the complete probability distribution instead of just an expected
value?

3|SM