MA – L2 – Q33 – Cost-volume-profit (CVP) analysis

Calculate Leaflet C sales needed for Apex Printing Solutions to achieve GH₵5,400 monthly profit with fixed orders for Leaflets A and B.

Question

Apex Printing Solutions
(a) The manager of Apex Printing Solutions has received enquiries about printing three different types of advertising leaflet, type A, type B, and type C. Selling price and cost information for these leaflets is shown below:

Leaflet type:	Type A	Type B	Type C
	GH₵	GH₵	GH₵
Selling price, per 1,000 leaflets	300	660	1,350
Estimate printing costs:
Variable costs, per 1,000 leaflets	120	210	390
Specific fixed costs per month	7,200	12,000	28,500

In addition to the specific fixed costs, GH₵12,000 per month will be incurred in general fixed costs.
Required:
Assuming that fixed orders have been received to print 50,000 of Leaflet A and 50,000 of Leaflet B each month, calculate the quantity of Leaflet C that must be sold to produce an overall profit, for all three leaflets combined, of GH₵5,400 per month. (B)

Apex Printing Solutions now receives an enquiry from a customer about printing 30,000 of a different type of leaflet. The customer is willing to pay GH₵25,000. The variable labour and overhead costs of producing these leaflets would be GH₵80 per 1,000 leaflets.

The leaflets would be printed on a special type of paper. This costs GH₵500 per 1,000 leaflets. However, there are already sufficient quantities of the paper in inventory for 20,000 of the leaflets. This special paper was purchased three months ago for a customer who then cancelled his order. The material has a disposal value of GH₵1,500, but it could also be used to produce 20,000 units of leaflet C. The cost of normal paper for leaflet C is GH₵300 per 1,000 leaflets.

Required:

Calculate the relevant costs of making the leaflets for this special order, and indicate by how much profit would increase as a result of undertaking the order.

Answer

(a) Tutorial note: The volume of sales required to achieve a target profit is an application of CVP analysis.

	GH₵
Target profit	5,400
General fixed costs	12,000
Specific fixed costs:
Leaflet Type A	7,200
Leaflet Type B	12,000
Leaflet Type C	28,500
Total contribution required	65,100
Contribution from:
50,000 Leaflets Type A: (50 × (300-120))	9,000
50,000 Leaflets Type B: (50 × (660-210))	22,500
Contribution required from Leaflets Type C	33,600

The contribution from Leaflets Type C is GH₵(1,350-390) = GH₵960 per 1,000 leaflets.
The sales quantity of Leaflets Type C required to achieve a target profit of GH₵5,400 each month is therefore GH₵33,600 / GH₵960 per 1,000 = 35,000 leaflets.

(b)

Relevant costs	GH₵
Materials
To be purchased: 10,000 × GH₵500 / 1,000	5,000
Currently held in inventory (Relevant cost = higher of [GH₵1,500 and (20,000 × GH₵300 / 1,000)])	6,000
Variable costs of labour/overheads (30,000 × GH₵80 / 1,000)	2,400
Total relevant costs	13,400
Contract price	25,000
Incremental profit	11,600

Tags: break-even analysis, contribution margin, CVP analysis, fixed costs, profit target, variable costs
Level: Level 2

Topic: Cost-volume-profit (CVP) analysis

Uploader: Salamat Hamid