- 15 Marks
MA – L2 – Q38- Cost-volume-profit (CVP) analysis
Question
Ofori Fabricators produces and markets a single product. Presently, the product is manufactured in a plant that relies heavily on direct labour force. Last year, the company sold 5,000 units with the following results:
| GH¢ | |
|---|---|
| Sales | 22,500,000 |
| Less: Variable expenses | 13,500,000 |
| Contribution margin | 9,000,000 |
| Less: Fixed expenses | 6,300,000 |
| Net income | 2,700,000 |
Required:
(a) Compute the break-even point in GH¢ and the margin of safety.
(b) Calculate the contribution margin ratio and the break-even point in units if the variable cost per unit increases by GH¢600? Also calculate the selling price per unit if the company wishes to maintain the contribution margin ratio achieved during the previous year.
(c) The company is also considering the acquisition of a new automated plant. This would result in the reduction of variable costs by 50% of the amount computed in (b) above whereas the fixed expenses will increase by 100%. If the new plant is acquired, how many units will have to be sold next year to earn net income of GH¢3,150,000.
Answer
(b) New CM Ratio
| GH¢ | |
|---|---|
| Selling price | 4,500 |
| Less: variable expense | 2,700 + 600 = 3,300 |
| Contribution Margin | 1,200 |
| Contribution margin % | 1,200 / 4,500 = 26.67% |
Break-even point in units
(c) No. of units to be sold next year to earn a profit of GH¢3,150,000
Selling price
| GH¢ | |
|---|---|
| Selling price | 4,500 |
| Less: variable expenses | 3,300 × 50% = 1,650 |
| Contribution margin | 2,850 |
Break even point in units = (Fixed Expense + Target Profit) / Contribution margin per unit
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