contribution margin

MA – L2 – Q46 – Decision making techniques

Compute Ouluto Limited's net profit for February 20X9 based on the optimum product mix, given resource constraints and cost data.

Question

Ouluto Limited (OUL) is engaged in the manufacture and sale of three products viz. WBA, QPR and SC. The following information is available from OUL’s records for the month of February 20X9:

	WBA	QPR	SC
Sales price per unit (GH₵)	2,300	1,550	2,000
Material cost per Kg. (GH₵)	250	250	250
Labour time per unit (Minutes)	20	30	45
Machine time per unit (Hours)	4	2.5	3
Net weight per unit of finished product (Kg.)	6	4	5
Yield (%)	90	95	92
Estimated demand (Units)	10,000	20,000	9,000

Each worker is paid monthly wages of GH₵15,000 and works a total of 200 hours per month. OUL’s total overheads are estimated at 20% of the material cost.
Fixed overheads are estimated at GH₵5 million per month and are allocated to each product on the basis of machine hours. 100,000 machine hours are estimated to be available in February 20X9.
Required:
Based on optimum product mix, compute OUL’s net profit for the month of February 20X9.

Answer

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Tags: contribution margin, fixed costs, Machine Hours, Manufacturing, Net profit, Optimal production, Product mix, Profit Maximization, Resource Allocation, variable costs
Level: Level 2

Topic: Decision making techniques

MA – L2 – Q45 – Decision making techniques

Compute units of each product for Image Solutions to maximize profit and calculate contribution at optimal mix, considering machine hour constraints.

Question

Image Solutions Limited deals in various products. Relevant details of the products are as under:

	PW	PX	PY	PZ
Estimated annual demand (units)	5,000	10,000	7,000	8,000
Sales price per unit (GH¢)	150	180	140	175
Material consumption:
R (kg)	2	2.5	1.5	1.75
T (kg)	0.5	0.6	0.4	0.65
Labour hours	2	2.25	1.75	2.5
Variable overheads (based on labour cost)	75%	80%	100%	90%
Fixed overheads per unit (GH¢) (based on 80% capacity utilisation)	10	20	14	16
Machine hours required:
Processing machine hours	5	6	8	10
Packing machine hours	2	3	2	4

Company has a long term contract for purchase of material R and T at a price of GH¢ 15 and GH¢ 20 per kg respectively. Wage rate for 8 hours shift is GH¢ 200.

The estimated overheads given in the above table are exclusive of depreciation expenses. The company provides depreciation on number of hours used basis. The depreciation on each machine based on full capacity utilisation is as follows:

	Hours	GH¢
Processing machine	150,000	150,000
Packing machine	100,000	50,000

The company has launched an advertising campaign to promote the sale of its products. GH¢ 2 million have been spent on such campaign. This cost is allocated to the products on the basis of sale.

Required:
Compute the number of units of each product that the company should produce in order to maximize the profit and also compute the product wise and total contribution at optimal product mix.

Answer

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Tags: Capacity constraints, contribution margin, Cost analysis, Limiting Factors, Machine Hours, Product mix, Production Planning, Profit Maximization, Resource Allocation, variable costs
Level: Level 2

Topic: Decision making techniques, Relevant cost and revenue

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

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

Topic: Cost-volume-profit (CVP) analysis

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.

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

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Tags: break-even analysis, contribution margin, CVP analysis, fixed costs, High/low analysis, variable costs
Level: Level 2

Topic: Cost-volume-profit (CVP) analysis

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.

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

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Tags: break-even analysis, contribution margin, CVP analysis, fixed costs, Overhead allocation, Sales mix, variable costs
Level: Level 2

Topic: Cost-volume-profit (CVP) analysis

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.

Question

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.

Answer

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Tags: break-even analysis, contribution margin, CVP analysis, fixed costs, Margin of safety, variable costs
Level: Level 2

Topic: Cost-volume-profit (CVP) analysis

MA – L2 – Q36 – Decision Making Techniques

Decide whether Akroma Ghana Limited should produce Item B internally or buy from a supplier under two conditions.

Question

Akroma Ghana Limited has a machine with which it produces Item A. Ten (10) machine hours are required to produce the item. This product’s selling price is GH₵150 with a variable cost of GH₵60. The company has just received an order for the supply of Item B. Each unit of Item B will require four (4) machine hours. The annual quantity of Item B required is 12,000 units and the cost estimates for the quantity is given below:

	GH₵
Direct material	125,000
Direct wages	52,000
Variable overheads	58,000
Floor space occupancy	11,500
Depreciation	7,500
Salary of Inspector for Item B alone	10,000
Total Cost	264,000

It was noted that Item B could be outsourced from a supplier at a cost of GH₵28 per unit.
You are required to assist management to decide whether to produce Item B internally or to buy from an outside supplier if the following conditions exist:
(i) Production of Item B will not in any way disturb the production of Item A.
(ii) The machine producing Item A is already fully engaged.

(B) List any FIVE steps in the management decision-making process.

Answer

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Tags: contribution margin, Incremental costs, Machine Hours, Make-or-Buy Decision, Opportunity costs, Relevant costs
Level: Level 2

Topic: Decision making techniques, Relevant cost and revenue

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.

Question

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.

Answer

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Tags: break-even analysis, contribution margin, CVP analysis, fixed costs, profit target, variable costs
Level: Level 2

Topic: Cost-volume-profit (CVP) analysis

MA – L2 – Q32 – High/low analysis

Calculate variable/fixed costs using high/low analysis for ZAMCO and assess profit impact of a customer's offer.

Question

ZAMCO

(a) Using the high/low method, calculate the variable cost per unit and the monthly fixed costs for ZAMCO.

(b) Calculate the normal sales price per unit and the contribution per unit at this sales price.

(c) A new customer has offered to buy 25,000 units each month from ZAMCO at a price that is 20% below the normal sales price. Accepting this offer would result in a fall in other sales by one-fifth of the units sold to the new customer. Advise whether ZAMCO should accept the new customer’s offer.

Answer

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Tags: contribution margin, CVP analysis, decision making, fixed cost, High/low analysis, Profit Analysis, variable cost
Level: Level 2

Topic: Cost-volume-profit (CVP) analysis

Tag (SQ): contribution margin

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MA – L2 – Q46 – Decision making techniques

Compute Ouluto Limited's net profit for February 20X9 based on the optimum product mix, given resource constraints and cost data.

MA – L2 – Q45 – Decision making techniques

Compute units of each product for Image Solutions to maximize profit and calculate contribution at optimal mix, considering machine hour constraints.

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

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

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.

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.

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.

MA – L2 – Q36 – Decision Making Techniques

Decide whether Akroma Ghana Limited should produce Item B internally or buy from a supplier under two conditions.

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.

MA – L2 – Q32 – High/low analysis

Calculate variable/fixed costs using high/low analysis for ZAMCO and assess profit impact of a customer's offer.

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MA – L2 – Q46 – Decision making techniques

Compute Ouluto Limited's net profit for February 20X9 based on the optimum product mix, given resource constraints and cost data.

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MA – L2 – Q45 – Decision making techniques

Compute units of each product for Image Solutions to maximize profit and calculate contribution at optimal mix, considering machine hour constraints.

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

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

You're reporting an error for "MA – L2 – Q41 – Cost-volume-profit (CVP) analysis"

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.

You're reporting an error for "MA – L2 – Q40 – Cost-volume-profit (CVP) analysis"

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.

You're reporting an error for "MA – L2 – Q39 – Cost-volume-profit (CVP) analysis"

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.

You're reporting an error for "MA – L2 – Q38- Cost-volume-profit (CVP) analysis"

MA – L2 – Q36 – Decision Making Techniques

Decide whether Akroma Ghana Limited should produce Item B internally or buy from a supplier under two conditions.

You're reporting an error for "MA – L2 – Q36 – Decision Making Techniques"

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.

You're reporting an error for "MA – L2 – Q33 – Cost-volume-profit (CVP) analysis"

MA – L2 – Q32 – High/low analysis

Calculate variable/fixed costs using high/low analysis for ZAMCO and assess profit impact of a customer's offer.

You're reporting an error for "MA – L2 – Q32 – High/low analysis"

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