BU1002/BU1902 – Accounting for Decision Making Solutions - Topic 9, 2020

Topic 9
Chapter 10 – Cost Volume Profit Analysis
Questions from Chapter 10
10.3 Explain the difference between mixed and variable costs. Provide examples of each.

Variable costs are commonly identified as those that change in total as the level of activity changes.
Typically, variable costs include such costs as ingredients for a food manufacturer or fuel costs for a courier.
We can consider variable costs on a total or unit basis.

Some costs may appear to possess fixed and variable characteristics, in which case the costs would be
classified as mixed costs (sometimes referred to as ‘semi-fixed costs’ or ‘semi-variable costs’). An example
of a mixed cost is internet charges with limited download — fixed rate for given number of MBs and then a
charge per MB used thereafter which would be variable.

10.4 Using examples, distinguish between fixed and variable costs.

Total fixed costs do not change within the relevant range of activity. For example, regardless of the level of
production, a manufacturer would still need to pay the rent, insurance and salaries of permanent staff.
Variable Costs per unit do not change, however total variable costs change proportionately with changes in
activity. For example a manufacturer who produces wooden tables. The cost per table would be the same;
however the total cost of manufacturing the tables will change proportionate to the level of production.
Say each table consumed $10 of variable costs (such as wood, nails, glue), if 10 tables were manufactured
the total variable cost would be $100 (10 tables × $10) and if 100 tables manufactured the total variable
cost would be $1000 (100 tables × $10).

10.5 Discuss the circumstances in which CVP analysis might be useful.

CVP analysis can be useful to help answer queries such as:

 How many units need to be sold or services performed to break even?
 What is the impact of a change in the mix between fixed and variable costs?
 How many units need to be sold or services performed to achieve a particular level of profit?
 What is the impact of a 15 per cent increase in prices?
 Which products or services are contributing best to the profit performance?

Therefore, CVP analysis is important in planning and decision making.

10.17 CVP analysis and break-even analysis are underpinned by a range of important assumptions.
Briefly discuss four such assumptions.

The key assumptions underlying CVP analysis include:

 the assumption that the behaviour of costs can be neatly classified as fixed or variable — which
may not be the case, as some costs do not behave as expected
 cost behaviour is generally assumed to be linear
 fixed costs are believed to remain ‘fixed’ over the time period and/or a given range of activity (often
referred to as the relevant range)
 unit price and cost data are assumed to remain constant over the time period and relevant range
 for multi-product entities, the sales mix between the products is assumed to be constant.
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BU1002/BU1902 – Accounting for Decision Making Solutions - Topic 9, 2020

10.21 Find the missing figure for each of the following independent cases. (Hint: reconstruct the
statement of profit or loss for each scenario).

Suggested Solution:
Selling Variable Units Contribution Fixed Profit
Price/unit Costs/unit Sold Margin (total) Costs (loss)
$40 $20 60 000 a. $1 200 000 b. $900 000 $300 000
$18 c. $12 10 000 $60 000 $48 000 d. $12 000
e. $25 $20 50 000 $250 000 f. $250 000 $0
$ $6 100 000 g. $200 000 $50 000 h. $150 000
$5 i. $4 500 000 j. $500 000 $460 000 $40 000

10.22 For each of the following independent situations, calculate the break-even point in units.
a. Variable cost per unit of $3, annual fixed costs of $42 750 and selling price per unit of $9.
b. Variable costs per unit of $10, annual fixed costs of $63 200and selling price per unit of $20.
c. Variable costs per unit of $20, annual fixed costs of $40 650 and selling price of $23.

a. $42 750 / ($9 – $3) = 7125 units

b. $63 200 / ($20 – $10) = 6320 units
c. $40 650 / ($23 – $20) = 13 550 units

10.29 Nicholas Cash of Advantage Tennis Coaching (ATC) has received an offer from a top-ranked
Australian player, Serena Novac, who wishes to spend two months in the beautiful Queensland
weather and have 50 private coaching sessions with Nicholas. If the offer is accepted, Nicholas
will need to hire an additional tennis court for a cost of $16 000 for two months. The following
data are provided.

Required
a. Calculate the number of tennis coaching sessions required for Nicholas to break even.
b. Draw a graph to show the cost–volume–profit relationships for this special contract for ATC.
Not required to complete
c. If Nicholas provides 50 coaching sessions for Serena, what is the amount of profit ATC would
achieve?

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BU1002/BU1902 – Accounting for Decision Making Solutions - Topic 9, 2020

d. To ensure Serena is happy with the coaching services provided, Nicholas has arranged for a
number of aspiring senior players to attend sessions for match play. ATC will pay $80 per
session for the match players. ATC wishes to maintain the same amount of profit with the
match players as calculated in (c) above. To achieve this, Nicholas will approach the manager
of Tennis Pro Shop and ask for the balls to be provided at no cost. Negotiations will then be
required between the Tennyson Tennis Centre manager and Nicholas regarding the fee for
the hire of the tennis court. What is the upper limit that Nicholas will be prepared to pay for
the hire of the court to maintain the amount of profit calculated in (c) above from 50
sessions.
e. What qualitative factors should Nicholas also consider?
Suggested Solution:
a. Break even in units = Fixed costs / Contribution margin per unit
Breakeven in units = $16 000 / ($650 – ($150 + $80))
Breakeven in units = $16 000 / ($650 – $230)
Breakeven in units = $16 000 / $420 = 38.0952380952381 sessions

c. Profit = (Sessions x CM) – FC = (50 x $420) – $16 000 = $5000 profit

or Sessions beyond BE x CM = (50 – 38.0952380952381) x $420 = $5000.

d. Provided the Tennyson Tennis Centre manager agrees to supply the tennis balls to ATC at no cost,
Nicholas can pay the same amount for the tennis court hire ($16 000), because the cost of the match
players ($80 per session) is equal to the previous cost of the tennis balls ($80 per session).
e. Effect on the relationship with the Tennis Pro Shop, benefit to business reputation from star player in
clinic and experience for senior players.

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BU1002/BU1902 – Accounting for Decision Making Solutions - Topic 9, 2020

10.32 Mermaid Enterprises operates a single-product entity. Data relating to the product for 2019
were as follows.

Required
a. Calculate the break-even in both dollars and units for 2019.
b. Calculate the margin of safety in both units and sales dollars.
c. Calculate the profit achieved in 2019 given the annual volume of 64 000 units.
d. Changes in marketing strategy are planned for 2020. This would increase variable marketing
and distribution costs by $4 per unit, and reduce fixed non-manufacturing costs by $160 000
per year. Calculate the units that would need to be sold in 2020 to achieve the same profit as
in 2019.
e. Would you recommend the change? Explain.

Suggested Solution:
a.
Selling price $60
Less
variable manufacturing $28
variable marketing etc. $12 $40
Contribution margin per unit $20
Break-even = $960 000 / ($20) = 48 000 units

b. Margin of safety =
Units = Sales 64 000 units less break-even 48 000 units = 16 000 units
Dollars = 16 000 units x $60 = $960 000

c. Profit = (64 000 units *$20) – $960 000 = $320 000

Or 16 000 units x $20

d. Contribution margin will increase due to increased variable costs

Currently $20 less additional $4 variable marketing = $16
To achieve same profit as 2019 = ($800 000 + $320 000)/ ($16) = 70 000 units

f. Based on the increased number of units required to achieve the same profit, the change is not
recommended in the short term.