RMIT Classification: Trusted

BUSM2567 Business Decision Making

Week 2 Workshop Class Exercise

Coffee Cube sells 1 kg bags of coffee beans to coffee shops.

Estimates for the next year are as follows:

Expected Sales (units) 25,000

$
Selling price per unit 42
Variable cost per unit 22
Total fixed costs 419,980

REQUIRED:
a) Calculate the breakeven point in units and sales dollars.
b) Calculate the margin of safety.
c) Calculate the number of units that need to be sold if Coffee Cube requires an after-
tax profit of $525,000. (Assume a tax rate of 20%).
d) Management is considering an investment in new technology that will increase fixed
costs by $220,000 per year, but will lower variable costs to 35% of sales. Sales units
are expected to remain the same in the coming year if the investment is made.
Advise management on whether they should go ahead with this investment.
Include in your answer the new breakeven point in units and sales dollars and the
impact on profit if the projected sales target is met.
e) Discuss other non-financial factors that Coffee Cube should consider when
deciding whether to purchase the new technology.
f) Cost-volume-profit (CVP) analysis is a useful management tool that aids
future decision making. CVP analysis is based on several assumptions; in
addition, there is also a degree of risk and uncertainty in CVP analysis.
Discuss 3 assumptions of CVP analysis.