MA – L2 – Q41 – Cost-volume-profit (CVP) analysis

Calculate breakeven point in units and sales value for Nartey Enterprises based on budgeted profit statement.

Question

Nartey Enterprises, a manufacturing organisation, has a budgeted profit statement for its next financial year, when it is expected to be operating at 75% level of capacity. The budget is given below:

	GH₵	GH₵
Sales 9,000 units at GH₵32		288,000
Less:
Direct materials	54,000
Direct wages	72,000
Production overhead:
fixed	36,000
variable	18,000
Administration and distribution costs:
fixed	42,000
variable	27,000	249,000
Profit		39,000

Required:
(a) Calculate the breakeven point in units and in sales value.

(b) Calculate the contribution/sales ratio. (c) Calculate the number of units to be sold to earn a profit of GH₵52,000.

(d) Calculate the profit that would be expected if the company operated at full capacity.

Answer

(a) Breakeven point in units and in value

	GH₵
Sales 9,000 units at GH₵32	288,000
Less:
Direct materials	54,000
Direct wages	72,000
Variable production overhead	18,000
Variable administration and distribution costs	27,000
	(171,000)
Total contribution	117,000

Fixed costs:
Fixed production overhead	36,000
Fixed administration and distribution costs	42,000
	78,000

Contribution per unit = Total contribution / Unit sales = 117,000 / 9,000 = GH₵13

Breakeven point (units) = Fixed cost / Contribution per unit = 78,000 / 13 = 6,000 units

Breakeven point (sales value) = 6,000 units × GH₵32 per unit = GH₵192,000

(b) Contribution/sales ratio

Contribution / Sales value = 117,000 / 288,000 = 0.40625

This could be used to calculate the breakeven point in sales value as follows:

Fixed costs / CS ratio = 78,000 / 0.40625 = GH₵192,000

(Fixed cost + Target profit) / Contribution per unit = (78,000 + 52,000) / 13 = 130,000 / 13 = 10,000 units

(d) Computation of expected profit at full capacity 100%

	GH₵
Contribution (GH₵117,000 / 0.75)	156,000
Less Fixed cost	78,000
Profit	78,000

Tags: Breakeven analysis, contribution margin, fixed costs, Sales value, variable costs
Level: Level 2

Topic: Cost-volume-profit (CVP) analysis

Uploader: Salamat Hamid