Tag (SQ): break-even analysis

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  • 20 Marks

FM – L2 – Q63 – DCF: Risk and uncertainty

Calculate NPV for two machines under different sales demand levels for Kofi Enterprises Ltd.

Kofi Enterprises Ltd must purchase a new machine for making a new product. There is a choice between two machines, Machine A and Machine B. Each machine has an estimated life of three years with no expected scrap value.
Machine A costs N₦15,000 and Machine B costs N₦20,000.
The variable costs of manufacture would be N₦1 per unit if Machine A is used and N₦0.50 per unit if Machine B is used. The product will sell for N₦4 per unit.
The demand for the product is uncertain. Following some market research, the following estimates of annual sales demand have been made:

Annual demand (Units) Probability
2,000 0.2
3,000 0.6
5,000 0.2

The sales demand in each year will be the same. For example, if the demand is 2,000 units in Year 1, it will be 2,000 units for every year of the project.
Taxation and fixed costs will be unaffected by any decision made.
Kofi Enterprises Ltd’s cost of capital is 6%.

Required:
(a) Calculate the NPV for each of investment options, Machine A and Machine B, for each of the possible levels of sales demand.

(b) Calculate the expected NPV for each of the investment options.

(c) Assume now that the decision is taken to buy Machine A.

(i) Calculate the probability that the NPV of the project will be negative.

(ii) Calculate the minimum annual sales required for the NPV of the project to be positive.

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  • 10 Marks

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

Evaluate four assumptions required for valid cost-volume-profit 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.

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  • 15 Marks

MA – L2 – Q40 – Cost-volume-profit (CVP) analysis

Compute break-even point in GH¢ and units for AquaPure Limited at GH¢16 per bottle using budgeted cost data.

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.

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  • 20 Marks

MA – L2 – Q39 – Cost-volume-profit (CVP) analysis

Compute break-even sales for Fuseni Limited's two products, maintaining budgeted sales ratio, with detailed overhead allocation.

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.

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  • 15 Marks

MA – L2 – Q38- Cost-volume-profit (CVP) analysis

Compute break-even point in GH¢ and margin of safety for Ofori Fabricators based on last year's sales and cost data.

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.

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  • 15 Marks

MA – L2 – Q33 – Cost-volume-profit (CVP) analysis

Calculate Leaflet C sales needed for Apex Printing Solutions to achieve GH₵5,400 monthly profit with fixed orders for Leaflets A and B.

Apex Printing Solutions
(a) The manager of Apex Printing Solutions has received enquiries about printing three different types of advertising leaflet, type A, type B, and type C. Selling price and cost information for these leaflets is shown below:

Leaflet type: Type A Type B Type C
GH₵ GH₵ GH₵
Selling price, per 1,000 leaflets 300 660 1,350
Estimate printing costs:
Variable costs, per 1,000 leaflets 120 210 390
Specific fixed costs per month 7,200 12,000 28,500

In addition to the specific fixed costs, GH₵12,000 per month will be incurred in general fixed costs.
Required:
Assuming that fixed orders have been received to print 50,000 of Leaflet A and 50,000 of Leaflet B each month, calculate the quantity of Leaflet C that must be sold to produce an overall profit, for all three leaflets combined, of GH₵5,400 per month.                                                                                                                                                                                                                                                           (B)

Apex Printing Solutions now receives an enquiry from a customer about printing 30,000 of a different type of leaflet. The customer is willing to pay GH₵25,000. The variable labour and overhead costs of producing these leaflets would be GH₵80 per 1,000 leaflets.

The leaflets would be printed on a special type of paper. This costs GH₵500 per 1,000 leaflets. However, there are already sufficient quantities of the paper in inventory for 20,000 of the leaflets. This special paper was purchased three months ago for a customer who then cancelled his order. The material has a disposal value of GH₵1,500, but it could also be used to produce 20,000 units of leaflet C. The cost of normal paper for leaflet C is GH₵300 per 1,000 leaflets.

Required:

Calculate the relevant costs of making the leaflets for this special order, and indicate by how much profit would increase as a result of undertaking the order.

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