Question 5: Cost-Volume Profit Analysis (10 marks) Paragon Concrete produces thr

Question

Question 5: Cost-Volume Profit Analysis (10 marks) Paragon Concrete produces three different concrete bricks namely C1, C2 and C3. The following information concerning these concrete bricks has been obtained from the plant's yearly records. C2 $72 $37 C3 $60 $35 C1 Selling Price per unit $55 Variable cost per unit $30 Normal production 7.200 units 5,400 units 5.400 units Total Fixed costs $10,080. The three concrete bricks use the same type of chemical X as the raw material. The following quantities are required by each of the concrete brick: CI-0.25 kg of X C2 -0.50 kg of X C3 -0.40 kg of X Required: a. What is the break-even point in total units, and for each concrete brick, if the present sales mix is maintained? Assume sales are proportional to production. (3 marks) Workings

Explanation / Answer

(a)

Weighted average contribution margin = $25 x 40% + $35 x 30% + $25 x 30% = $28

Brakeven quantity = Fixed Cost / Weighted average contribution margin = $10,080 / $28 = 360 units (total)

Breakeven quantity for C1 = 360 x 40% = 144
Breakeven quantity for C2 = 360 x 30% = 108
Breakeven quantity for C3 = 360 x 30% = 108

(b)

Total production this year = 7200+5400+5400 = 18000

Total production next year = 18000 x 1.2 = 21600

Weighted average contribution margin = $28 does not change because the model mix in unchanged.

Fixed cost for the next year = $10080 x 1.2 = $12096

Profit = 21600 x $28 - $12096 = $592,704

(c)

X consumed at normal production = 7200 x 0.25 + 5400 x 0.50 + 5400 x 0.40 = 6,660 Kg

Avaialble X = 7,000 Kg (i.e. excess of 340 Kg)

We will take the (Ratio = Contribution margin / consumed X per unit) for the three products and select the product that has the highest ratio to consume this 340 kg of X.

Best on the highest ratio, we select C1. So, the extra production of C1 will be 340 kg / 0.25 kg per unit = 1360 units.

So, the new product mix will be C1:C2:C3 = (7200+1360):5400:5400 = 8560:5400:5400

C1 C2 C3 Selling price $55 $72 $60 Variable cost $30 $37 $35 Normal Production 7200 5400 5400 Production % 40.0% 30.0% 30.0% Contribution margin $25 $35 $25

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