Cost II Individual Assignment On CH 1 CVP Analysis-5

COST AND MANAGEMENT ACCOUNTING II
INDIVIDUAL ASSIGNMENT ON CHAPTER 1 CVP ANALYSIS (5Marks)

Submission Date: Sunday, 25/10/2016 @ 3:00 LT
Note: MID Exam (25%) will be on the same date & time
Prepared by: Gebrie W. (MSc.)
Exercise 1. Break – Even and Target Profit Analysis
Dire Company has a product that sells for $30 per unit. The variable expenses are $22 per unit,
and fixed expenses total $30,000 per year.
Required:
A. What is the total contribution margin at the break-even point?
B. What is the contribution margin ratio for the product?
C. If total sales increase by $20,000 and fixed expenses remain unchanged, by how much
would net operating income be expected to increase?
D. The marketing manager wants to increase advertising by $6,000 per year. How many
additional units would have to be sold to increase overall net operating income by
$2,000?
Exercise 2. Break – Even and Target Profit Analysis
Lindon Company is the exclusive distributor for an automotive product that sells for $40 per unit and
has a CM ratio of 30%. The company’s fixed expenses are $180,000 per year.
Required:
1) What are the variable expenses per unit?
2) Using the equation method:
a) What is the break – even point in units and sales dollars?
b) Show the breakeven point graphically
c) What sales level in units and in sales dollars is required to earn an annual profit of
$60,000?
d) Assume that by using a more efficient shipper, the company is able to reduce its variable
expenses by $4 per unit. What is the company’s new break – even point in units and sales
dollars?
3) Repeat (2) above using the contribution margin method.
Exercise 3. Break – Even Analysis; Target Profit; Margin of Safety; CM Ratio
Menlo Company manufactures and sells a single product. The company’s sales and expenses are
as follow:
Total Per Unit

Sales $450,000 $30
Less variable expenses 180,000 12
Contribution margin 270,000 $18
Less fixed expenses 216,000
Net operating income $ 54,000
Required:
1) What is the break – even point in units sold and in sales dollars?
2) Show the breakeven point graphically
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3) Without resorting to computations, what is the total contribution margin at the break – even
point?
4) How many units would have to be sold to earn a target profit of $90,000? Use the
contribution margin method. Verify your answer by preparing a contribution format
income statement at the target sales level.
5) Refer to the original data. Compute the company’s margin of safety in both dollar and
percentage terms.
6) What is the company’s CM ratio? If sales increase by $50,000 and there is no change in
fixed expenses, by how much would you expect net operating income to increase?
Exercise 4. Using of CVP analysis for Decision Making, Operating leverage
Candice Corporation has decided to introduce a new product. The product can be manufactured
using either a capital-intensive or labour-intensive method. The manufacturing method will not
affect the quality or sales of the product. The estimated manufacturing costs of the two methods
are as follows:
The company's market research department has recommended an introductory selling price of
$30 per unit for the new product. The annual fixed selling and administrative expenses of the
new product are $500,000. The variable selling and administrative expenses are $2 per unit
regardless of how the new product is manufactured.
Required:
A. Calculate the break-even point in units if Candice Corporation uses the:
1. Capital-intensive manufacturing method.
2. labour-intensive manufacturing method.
B. Determine the unit sales volume at which the net operating income is the same for the
two manufacturing methods.
C. Assuming sales of 250,000 units, what is the degree of operating leverage if the
Company uses the:
1. Capital-intensive manufacturing method.
2. labour-intensive manufacturing method.
D. What is your recommendation to management concerning which manufacturing
method should be used?
Exercise 5. Sales mix and breakeven point analysis
Xyz co. produce and sell two product, product x and product y with the following production
information;
Product x Product Y
Selling price 500 birr 750 birr
Variable cost per unit 250 birr 375 birr
Budgeted sales 250 unit 400 unit
Fixed cost 5,000 birr
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Required: based on the above information calculate;
A. Breakeven point quantity of sales mix and allocate for each product.
B. Breakeven point revenue of sales mix and allocate for each product.
Exercise 6. C-V-P and cost planning
Target operating income is 40,000 birr with selling price of 1,000 birr.
Case Fixed cost Variable cost

A 0 800
B 20,000 600
C 35,000 450
Required: based on the above information calculate;
A. Calculate Break even point quantity and Target income quantity and compare the risk
of loss and return of each cases.
B. Calculate the degree of operating leverage for each case, assume the sales level is 100
unit.
C. If the sales level increase by 50% (from 100 to 150), compare the changes in operating
income due to changes in level of output and show which case has more operating.
Exercise 7. Absorption and variable costing
Dire Company, a company that produces a single product at a selling price 60 birr and that has the
following cost structure:
Number of units produced each year 20,000
Variable costs per unit:
Direct materials $10
Direct labor $20
Variable manufacturing overhead $5
Variable selling and administrative $6
expenses
Fixed costs per year:
Fixed manufacturing overhead $60,000
Fixed selling and administrative expenses $15,000
Required:
1. Compute the unit product cost under absorption costing.
2. Compute the unit product cost under variable costing.
3. If the company sold 15,000 unit out of 20,000 unit, Prepare absorption costing and
variable costing income statement and show the difference of operating income.
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COST AND MANAGEMENT ACCOUNTING II

INDIVIDUAL ASSIGNMENT ON CHAPTER 1 CVP ANALYSIS (5Marks)

Exercise 3. Break – Even Analysis; Target Profit; Margin of Safety; CM Ratio

Total Per Unit

Exercise 4. Using of CVP analysis for Decision Making, Operating leverage

Exercise 5. Sales mix and breakeven point analysis

Exercise 6. C-V-P and cost planning

Case Fixed cost Variable cost

Exercise 7. Absorption and variable costing

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