QUESTION 5 CVP Analysis Guide to marks: 20 marks – 4 for a, 4 for b, 4 for c, 8

Question

QUESTION 5 CVP Analysis

Guide to marks: 20 marks – 4 for a, 4 for b, 4 for c, 8 for d

Show all calculations to support your answers.

A manufacturer can make two products, A and B. The following data are available:B

(a)Calculate the unit contribution margin for each product.
(b)This month the manufacturer will specialise in making only Product B. How many does he need to sell to break even?
(c)If they specialise in making only A what is the breakeven sales volume for the month in sales dollars?
(d)He now decides to manufacture both A and B this month in the ratio of 3 of A to 1 of B.
(i)How many of each product must be sold to earn a profit of $3,500 before tax for the month?
(ii)How many of each product must be sold to earn a profit of $8,400 after tax (of 30c in the dollar) for the month?

Product A B Total Sales price per unit $12 $15 Variable cost per unit $8 $10 Total fixed costs/month $5,000

Explanation / Answer

Solution: a) Calculation of unit contribution margin Unit Contribution Margin= (Selling Price - Variable Cost)/ Selling Price Product A= (12-8)/12=0.33 Product B= (15-10)/15= 0.33 b) Break even point in units = Fixed Cost/ Variable cost per unit Break even point in units of Product B= $5000/ $10= 500 units c) Break even sales volume in sales dollars = Fixed Cost / Unit Contribution Margin Break even sales volume in sales dollars of Product A= $5000/ 0.33= $15,151.51 d) Ratio of manufacturing Product A : Product B = 3:1 If 3 units of product A manufactures then 1 unit of Product B would be manufacture (i) Let no. of units sold be x Contribution must cover fixed cost and profit totalling to Rs. ($5000 + $3500)= $8500 3x*4 + x*5 = 8500 12x+5x=8500 x= 8500/17= 500 units 500*3= 1500 units of Product A and 500 units of Product B must be sold to earn profit of $3500 before tax for the month (ii) After tax profit = $8400 Tax Rate 30cents = 30% Before tax profit = 8400/0.70= $12000 Let no. of units sold be x Contribution must cover fixed cost and profit before tax totalling to Rs. ($5000 + $12000)= $17000 3x*4 + x*5 = 17000 12x+5x=17000 x= 17000/17= 1000 units 1000*3= 3000 units of Product A and 100 units of Product B must be sold to earn profit after tax $8400 for the month

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