MA – L2 – Q53 – Cost-volume-profit (CVP) analysis

(a) For any cost volume profit analysis to be valid, a number of important assumptions must reasonably be satisfied within the relevant range. As a management accountant for your organization, evaluate any four assumptions that must be satisfied in cost-volume-profit analysis.

 (b) Determine the number of units at the break-even point.

(a) The behavior of total revenue is linear. This implies that the price of the produc6t or service will not change as sales volume varies within the relevant range.                                                                                                                                                                                       (ii) The behavior of total expenses is linear over the relevant range . This implies expenses can be categorized as fixed, variable or semi-variable Total fixed expenses remain constant as activity changes, and unit variable expenses remains unchanged as activity varies. secondly, the  efficiency of the production process and workers remain constant.                                                                    (iii) In multi-product organizations the sales mix remain constant over the relevant range.                                                                   (iv) In manufacturing firms, the inventory at the beginning and end of the period are the same. This means unit produced are all sold.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     (b)

(i) Sales mix = LQ:MQ:HQ in the ratio of 2:1:1 or 50%:25%:25%

(ii) Unit contribution:

Sales Variable Cost Contribution
High Quality (HQ) 2,300 (1,080 + 60) 1,160
Medium Quality (MQ) 1,700 (690 + 40) 970
Low Quality (LQ) 1,000 (450 + 30) 520

Contribution weighted:
LQ: 520 × 0.50 = 260
MQ: 970 × 0.25 = 242.5
HQ: 1,160 × 0.25 = 290
Total = 260 + 242.5 + 290 = 792.5

(iii) Break-even point:
310,000 ÷ 792.5 = 391 units

In proportion:
LQ: 391 × 0.50 = 196 units
MQ: 391 × 0.25 = 98 units
HQ: 391 × 0.25 = 98 units