ACB 10203 : MANAGEMENT ACCOUNTING

TUTORIAL CVP

Question 1

Shrek & Fiona Company manufactures an engine for carpet cleaners called the "Snooper."
Budgeted cost and revenue data for the "Snooper" are given below, based on sales of
40,000 units.

Sales RM1,600,000
Less: Cost of goods sold 1,120,000
Gross margin RM 480,000
Less: Operating expenses 100,000
Net income RM 380,000

Cost of goods sold consists of RM800,000 of variable costs and RM320,000 of fixed costs.
Operating expenses consist of RM40,000 of variable costs and RM60,000 of fixed costs.

Required:

Selling price = 1,600,000 / 40,000 = 40

Variable cost = 800,000 + 40,000 = RM 840,000

Variable cost per unit = total variable cost / unit sold

= RM 840,000 / 40,000 unit
= 21

Fixed cost = 320,000 + 60,000

= 380,000

a)Calculate the break-even point in units and sales dollars.

 Breakeven points in units = fixed expenses / contribution margin

= RM 380,000 / (RM40 - 21)
= RM 380,000 / 19
= 20,000

 Breakeven points in sales dollar = fixed expenses / contribution margin ratio

= 380,000 / (19 / 40)
= 380,000 / 0.475
= 800,000
b) Shrek & Fiona received an order for 6,000 units at a price of RM25.00. There will be
no increase in fixed costs, but variable costs will be reduced by RM0.54 per unit
because of cheaper packaging. Determine the projected increase or decrease in profit
from the order

6,000 units
Sales 150,000
(-) variable expenses (21 - 0.54 x 6,000) (122,760)
Contribution margin 27,240
(-) fixed expenses (380,000)
Net operating income 352,760
Question 2

Aman plans to start a mobile apam balik business in two months’ time after completing his
college degree. He does not need to purchase a van because his uncle has agreed to loan
him the van for two years without charge. However, Aman has to pay only for the fuel
consumption of the van. He estimated the following costs for each month of operation:

Monthly costs RM
Business license 10.00
Salary for his assistance 150.00
Cost of van fuel 50.00
Cost of cooking gas 50.00

Costs per apam balik RM

Flour 0.18
Sugar 0.10
Ground nuts 0.10
Oil 0.05
Other ingredients 0.10
Wrapping plastic 0.07

Aman sets the selling price at RM 1.20 per apam balik because he founds that this is the
most popular price of apam balik in the surrounding area of his business.

Required:

a) How many units of apam balik does Aman sell in order to achieve a profit of RM1,000
per month?

 Unit sales to attain the target profit = target profit + fixed expenses /
contribution margin per unit
unit sales = RM 1,000 + RM 260 / (RM1.20- RM0.60)
unit sales = RM 1,000 / RM 0.60
unit sales = 2,100 units.

b) Aman intends to reduce the price to RM1.00 per apam balik if he sells in a rural area.
What is the break- even point in units and RM if he operates in the rural area?

 Unit sales to breakeven = fixed expenses / contribution margin

= RM 260 / (RM 1.00- RM 0.60)
= RM 260 / RM 0.40
= 650 units

 RM sales to breakeven = fixed expenses / contribution margin ratio

= RM 260 / (RM 0.40 / RM 1.00)
= RM 260 / RM 0.40
= RM 650
c) During inflation, Aman estimates the cost per apam balik will increase by 20 percent.
How many units of apam balik need to sell if Aman does not want to earn any profit
and loss during the inflation?

 Selling price = 20% increase

= (20% x RM 1.00)

Variable cost per unit = 20% x RM 0.60

= RM 0.72

Unit contribution margin = RM 1.20 – RM 0.72

= RM 0.48

Unit sales to breakeven = fixed expenses / unit contribution margin

= RM 260 / RM 0.48
= 542

d) During a wet month, Aman estimates that he can only sell 1,800 apam balik per
month in the urban area. How much is his profit during the wet month?

 Profit = (sales – variable cost) – fixed cost

Sales = selling price per unit (SP) x quantity sold (Q)

= RM 1.20 X 1,800
= RM 2,160

Variable cost = variable expenses per unit (VC) x quantity sold (Q)
= RM 0.60 x RM 1,800
= RM 1,080

Fixed cost = RM 260

Profit = (RM 2,160 – RM 1,080) – RM260

= RM 820.

e) Briefly explain three (3) assumptions used in cost volume profit analysis.

Notes: Assume situation in (a) until (d) are independent of each other.
Question 3

Jati Sdn Bhd produces and sells a single product. The company's income statement for the
most recent month is given below:
RM RM
Sales (6,000 units at RM40 per unit) 240,000
Less manufacturing costs:
Direct materials 48,000
Direct labor (variable) 60,000
Variable factory overhead 12,000
Fixed factory overhead  30,000  150,000
Gross margin 90,000
Less selling and other expenses:
Variable selling and other expenses 24,000
Fixed selling and other expenses  42,000    66,000
Net operating income 24,000

There is no beginning or ending inventories.

Required:

a) Redraft the company's income statement in contribution margin format.

b) Compute the company's monthly break-even point in units of product.

c) What would the company's monthly net operating income be if sales increased by
25% and there is no change in total fixed expenses?

d) The company has decided to automate a portion of its operations. The change will
reduce direct labor costs per unit by 40 percent, but it will double the costs for fixed
factory overhead. Compute the new break-even point in units.