- 20 Marks
MA – L2 – Q39 – Cost-volume-profit (CVP) analysis
Question
Fuseni Limited has two divisions each of which makes a different product. The budgeted data for the next year is as under:
| Product A | Product B | |
|---|---|---|
| Sales | GH¢ 200,000,000 | GH¢ 150,000,000 |
| Direct material | GH¢ 45,000,000 | GH¢ 30,000,000 |
| Direct labour | GH¢ 60,000,000 | GH¢ 45,000,000 |
| Factory overheads | GH¢ 35,000,000 | GH¢ 15,000,000 |
| Price per unit | GH¢ 20 | GH¢ 25 |
Details of factory overheads are as follows:
(i) Product A is stored in a rented warehouse whose rent is GH¢0.25 million per month. Product B is required to be stored under special conditions. It is stored in a third party warehouse and the company has to pay rent on the basis of space utilised. The rent has been budgeted at GH¢0.12 million per month.
(ii) Indirect labour has been budgeted at 20% of direct labour. 70% of the indirect labour is fixed.
(iii) Depreciation for assets pertaining to product A and B is GH¢6.0 million and GH¢2.0 million respectively.
(iv) 80% of the cost of electricity and fuel varies in accordance with the production in units and the total cost has been budgeted at GH¢4.0 million.
(v) All other overheads are fixed.
Required:
Compute the break-even sales assuming that the ratio of quantities sold would remain the same, as has been budgeted above.
Answer
Fuseni Limited
| Product A | Product B | Total | |
|---|---|---|---|
| Sale – units | 10,000,000 | 6,000,000 | 16,000,000 |
| Sales price per unit | 20 | 25 | |
| Sales in GH¢ | 200,000,000 | 150,000,000 | 350,000,000 |
| Less: Variable costs | |||
| Direct material | 45,000,000 | 30,000,000 | – |
| Direct labour | 60,000,000 | 45,000,000 | – |
| Variable overheads | 5,600,000 | 5,340,000 | – |
| 110,600,000 | 80,340,000 | 190,940,000 | |
| Contribution margin (GH¢) | 89,400,000 | 69,660,000 | 159,060,000 |
| Contribution margin % to sales | 45.446% | ||
| Break even sales: | |||
| Total 39,060,000 / 0.45446 | 85,948,699 | ||
| A (Qty) | |||
| 85,948,699 / 350,000,000 * 10,000,000 | 2,455,677 | ||
| B (Qty) | |||
| 85,948,699 / 350,000,000 * 6,000,000 | 1,473,406 | ||
| Sales price per unit | |||
| Sales in GH¢ | 49,113,540 | 36,835,150 | |
| Note 1: Variable & fixed overheads: | |||
| Total overheads as given | 35,000,000 | 15,000,000 | 50,000,000 |
| Variable overheads: | |||
| – Rent based on space utilised (so variable cost): 120,000 * 12 | 1,440,000 | ||
| – Indirect labour | |||
| 60,000,000 * 20% * 30% | 3,600,000 | ||
| 45,000,000 * 20% * 30% | 2,700,000 | – | |
| – Electricity & fuel | |||
| (4,000,000 * 80%) / 16,000,000 * 10,000,000 | 2,000,000 | – | – |
| (4,000,000 * 80%) / 16,000,000 * 6,000,000 | 1,200,000 | – | |
| Variable overheads | (5,600,000) | (5,340,000) | (10,940,000) |
| Fixed costs | |||
| (Total overheads – Variable overheads) | 29,400,000 | 9,660,000 | 39,060,000 |
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