- 15 Marks
MA – L2 – Q40 – Cost-volume-profit (CVP) analysis
Question
AquaPure Limited is planning to produce mineral water. It is contemplating to purchase a plant with a capacity of 100,000 bottles a month. For the first year of operation the company expects to sell between 60,000 to 80,000 bottles. The budgeted costs at each of the two levels are as follows:
| Particulars | 60,000 bottles | 80,000 bottles |
|---|---|---|
| Material | 360,000 | 480,000 |
| Labour | 200,000 | 260,000 |
| Factory overheads | 120,000 | 150,000 |
| Administration expenses | 100,000 | 110,000 |
The production would be sold through retailers who will receive a commission of 8% of sale price.
Required:
(a) Compute the break-even point in GH¢ and units if the company decides to fix the sale price at GH¢16 per bottle.
(b) Compute the break-even point in units if the company offers a discount of 10% on purchase of 20 bottles or more, assuming that 20% of the sales will be to buyers who will avail the discount.
Answer
(a)
Calculation of variable and fixed cost
| Total costs | Variable cost | |||||
|---|---|---|---|---|---|---|
| 60,000 bottles | 80,000 bottles | 20,000 bottles | Per bottle C/20,000 | 60,000 bottles D × 60,000 | Fixed cost | |
| A | B | C | D | E | ||
| Material | 360,000 | 480,000 | 120,000 | 6.00 | 360,000 | 0 |
| Labour | 200,000 | 260,000 | 60,000 | 3.00 | 180,000 | 20,000 |
| Factory overheads | 120,000 | 150,000 | 30,000 | 1.50 | 90,000 | 30,000 |
| Administration expenses | 100,000 | 110,000 | 10,000 | 0.50 | 30,000 | 70,000 |
| 780,000 | 1,000,000 | 220,000 | 11.00 | 660,000 | 120,000 |
(a)
Variable cost per bottle as above | GH¢11.00
Commission to retailers (8% of GH¢16.00) | GH¢1.28
Variable cost per bottle | GH¢12.28
Contribution per bottle (16.00 – 12.28) | GH¢3.72
PV ratio (contribution to sales ratio 3.72 / 16.00) | 23.25%
Break-even point (bottles) = Fixed cost / Contribution per bottle = 120,000 / 3.72 = 32,258 bottles
Break-even point in GH¢ = 32,258 × 16.00 = GH¢516,128
(b)
Sales price | GH¢16.00
Discount @ 10% on 20% of sales = 0.02 of GH¢16.00 | GH¢0.32
New average sales price | GH¢15.68
Variable cost per bottle as above | GH¢11.00
Commission to retailers (8% of GH¢15.68) | GH¢1.25
Variable cost per bottle | GH¢12.25
Contribution per bottle (15.68 – 12.25) | GH¢3.43
Break-even point (bottles) = Fixed cost / Contribution per bottle = 120,000 / 3.43 = 34,985 bottles
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