Task 3: Cost-Volume-Profit Analysis Woods & Co. has prepared a budget for the ne
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Task 3: Cost-Volume-Profit Analysis Woods & Co. has prepared a budget for the next 12 months when it intends to make and sell four products. Details of the expected sales volume, and standard price and cost are shown below: - Variable Cost (RM 14.00 8.00 4.20 7.00 Product ) Sales (Units) 10,000 10,000 50,000 20,000 Selling Price (RM) 20 40 10 Budgeted fixed costs are RM240,000 per annum. Required: a. Calculate the total contribution earned by each product and their combined total contributions. b. Calculate the breakeven point and breakeven sales revenue for Woods &Co; c. Calculate the margin of safety in percentage and in units for Woods & Co. and interpret your (2.5) answer. (4.5) Suggest THREE (3) ways in which Woods &Co.; may further improve their overall contribution to sales. d. Explain TWO (2) uses of the cost-volume-profit (CVP) analysis and ONE (1) difference between the economist's and accountant's model. e. (Total : 20)Explanation / Answer
a) contribution per unit = selling price per unit- variable cost per unit
& total contribution= contribution per unit* no of units sold
for product A =20-14
contribution p.u =6 per unit
total contribution-6 p.u*10,000 units =RM60,000
for product B =40-8
contribution p.u =32 per unit
total contribution-32 p.u*10,000 units =RM3,20,000
for product C =4-4.20
contribution p.u =(.20)per unit
total contribution-(.20) p.u*50,000 units =RM(10,000)
for product D =10-7
contribution p.u =3 per unit
total contribution-3 p.u*20,000 units =RM60,000
Combined contribution(in RM)=60,000+320,000+(10,000)+60,000
=430,000
no. of units(combined for woods& co)=90,000 units
contribution per unit=4.78 per unit (approx) or
total sales( woods& co) 10000*20+10000*40+50000*4+20000*10 =10,00,000
-variable cost(woods&co)10000*14+10000*8+50000*4.20+20000*7=5,70,000
total contribution=10,00,000-5,70,000=4,30,000
b)break even sales=fixed cost/contribution per unit
=240000/4.78
=50232 units
break even sales revenue= fixed cost/ pv ratio
=240000/(430000/1000000)
RM558140
c) margin of safety sales(units)=total sales- break even sales
=90,000-50232 units
=39768 units
margin of safety sales(%)= margin of safety sales/total sales*100
=39768/90000*100
=44.186%
INTERPRETATION- Margin of safety sales is the difference between the sales at a particular level and the break even sales,whereas a large margin indicates the soundness of the company, a small margin indicates a non sound position.in the above case woods&co has a margin of safety sales of 44% (approximately) which indicates that the company is in a sound position.
d) Three ways in which woods&co can further improve their overall contribution to sales are as follows
i)it can change its product mix as we can see from the above analysis that the product c is generating negative contribution and product b is generating maximum contribution, so it can change its product mix so as to increase the overall contribution of the company.
ii)it can increase its selling price price per unit and try to reduce its variable cost per unit and thus resulting in increase in contribution per unit as we can see from the above analysis that product c is generating negative contribution so we can increase its selling price per unit or reduce its variable cost per unit so as to increase the overall contribution of the company.
iii) it can increase the volume of the products that are generating maximum contribution and/or reduce the volume of products that are generating negative or least contribution for the company as we can see from the above analysis that product c is generating negative contribution so we can reduce its volume or elimanate it and instead produce more of product b so as to increase the overall contribution of the company.
d)cost-volume-profit analysis is very useful to determine how the changes in the cost and volume affect the profitability of a company.two uses of CVP analysis are as under:-
i)it is used by the companies to make decisions about the product or services that they should sell and produce and to analyse the profitability of the products so as to take cost effective decesions.
ii)it is also widely used by the companies to determine the profitability of the product so the businees can focus on more profitable products and can take informed decisions accordingly.
1 difference between the economist's and accountant model
accountant's model focuses on recording transactions which are of financial nature and analysis everything from finance point of veiw whereas economist's are concerned with efficent allocation of resources.
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