BKAM3023 Management Accounting II

Topic 1: Cost-Volume-Profit (CVP) Analysis

Exercise 1

New Fashion Sdn Bhd operates a chain of shirt stores around Kedah. The stores
carry many styles of shirts that are sold at the same price. To encourage sales
personnel to be aggressive in their sales efforts, the company pays a substantial
sales commission on each shirt sold. Sales personnel also receive a small basic
salary. The following information contains cost and revenue data for Store C:

Per shirt Annual

(RM)
Selling price 40.00 Fixed expenses:
Rent 80,000
Variable expenses: Advertising 150,000
Invoice cost 18.00 Salaries 70,000
Sales commission 7.00 Total fixed expenses 300,000
Total variable expenses 25.00

New Fashion Sdn Bhd is a fairly new organization. The company has asked you,
as a member of its planning group, to assist in some basic analysis of its stores
and company policies.

REQUIRED:

(a) Calculate the annual break-even point in RM sales and in unit sales for
Store C.

RM sales to break-even = fixed expenses / CM ratio

= 300,000 / ((40-25)/40)
= RM800,000

Unit sales to break-even = fixed expenses / CM per unit

= 300,000 / (40-25)
= 20,000 unit

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(b) Prepare a CVP graph showing cost and revenue data for Store C from
zero level of activity up to 30,000 shirts sold each year. Clearly indicate
the break-even point on the graph.

1400000

1200000

1000000
800000
800000
RM

600000 Total expenses

Fixed expenses
400000 Sales

200000

0
0 5000 10000 15000 20000 25000 30000 35000
Unit

(c) If 19,000 shirts are sold in a year, what would be Store C’s net operating
income or loss?

Net operating loss = (20,000 – 19,000) x (40-25)

= RM15,000

(d) The company is considering paying the store manager of Store C an

incentive commission of RM3 per shirt (in addition to the salespersons’
commissions). If this change is made, what will be the new break-even
point in RM sales and in unit sales?

RM sales to break-even = fixed expenses / CM ratio

= 300,000 / ((40-28)/40)
= RM1,000,000

Unit sales to break-even = fixed expenses / CM per unit

= 300,000 / (40-28)
= 25,000 unit

(e) Refer to original data. As an alternative to (d) above, the company is

considering paying the store manager a RM3 commission on each shirt
sold in excess of the break-even point. If this change is made, what will be
the store’s net operating income or loss if 23,500 shirts are sold in a year?

Net operating income = (23,500-20,000) x (40-28)

= RM42,000
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(f) Refer to the original data. The company is considering eliminating sales
commissions entirely in its stores and increasing fixed salaries by
RM107,000 annually.
(i) If this change is made, what will be the new break-even point in RM
sales and in unit sales in Store C.

RM sales to break-even = fixed expenses / CM ratio

= 407,000 / ((40-18)/40)
= RM740,000

Unit sales to break-even = fixed expenses / CM per unit

= 407,000 / (40-18)
= 18,500 unit

(ii) Would you recommend that the change be made? Explain.

Yes because the break-even point is dropped

Although the change will lower the break-even point from 20,000 shirts to 18,500
shirts, the company must consider whether this reduction in the break-even point
is more than offset by the possible loss in sales arising from having the sales
staff on a salaried basis. Under a salary arrangement, the sales staff may have
far less incentive to sell than under the present commission arrangement,
resulting in a loss of sales and a reduction in profits. Although it generally is
desirable to lower the break-even point, management must consider the other
effects of a change in the cost structure. The break-even point could be reduced
dramatically by doubling the selling price per shirt, but it does not necessarily
follow that this would increase the company’s profit.

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Exercise 2

Good Furniture Sdn Bhd distributes a lightweight chair that sells for RM15 per
unit. Variable costs are RM6 per unit, and fixed costs total RM180,000 annually.

REQUIRED:
Answer the following independent questions:

(a) What is the product’s CM ratio?

CM ratio = (15-6) / 15
= 60%

(b) Use the CM ratio to determine the break-even point in RM sales.

RM sales to break-even = 180,000 / 60%

= RM300,000

(c) The company estimate that sales will increase by RM45,000 during the
coming year due to increased demand. By how much should net operating
income increase?

45,000 / 15 = 3,000 units

Increase in net operating income = (15-6) x 3000

= RM27,000

(d) Assume that the operating results for last year were as follows:
RM
Sales 360,000
Less variable expenses 144,000
Contribution margin 216,000
Less fixed expenses 180,000
Net operating income 36,000
(i) Calculate the degree of operating leverage at the current level of sales.

degree of operating leverage = 216,000 / 36,000

=6

(ii) The president expects sales to increase by 15% next year. By how
much should net income increase.

Increase in net income = 6 x 15%

= 90%

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(e) Refer to the original data. Assume that the company sold 28,000 units last
year. The sales manager is convinced that a 10% reduction in the selling
price, combined with a RM70,000 increase in advertising expenditures,
would cause annual sales in units to increase by 50%. Prepare TWO (2)
contribution income statements, one showing the results of last year’s
operations and one showing what the results of operations would be if
these changes were made. Would you recommend that the company do
as the sales manager suggests?

Good Furniture Sdn Bhd

Contribution income statements
Sales (28,000 x 15) 420,000
- Variable expenses (28,000 x 6) 168,000
Contribution margin 252,000
- Fixed expenses 180,000
Net operating income 72,000

Good Furniture Sdn Bhd

Contribution income statements
Sales (42,000 x 13.5) 567,000
- Variable expenses (42,000 x 6) 252,000
Contribution margin 315,000
- Fixed expenses 250,000
Net operating income 65,000

I will not recommend the company to use the suggestion because the net
operating income will be decreased

(f) Refer to the original data. Assume again that the company sold 28,000
last year. The president feels that it would be unwise to change the selling
price. Instead, he wants to increase the sales commission by RM2 per
unit. He thinks that this move, combined with some increase in
advertising, would cause annual sales to double. By how much could
advertising be increased with profits remaining unchanged? Do not
prepare an income statement; use the incremental analysis approach.

Increase in CM (56000 x 7 - 28,000 x 140,000

9)
Increase in advertising expenses 140,000
Increase in net operating income 0

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Exercise 3

Maju Sdn Bhd has been operating for only a few months. The company sells
three types of tables, plastic, wooden and steel. Budgeted sales by product and
in total for the coming month are shown below:

Plastic Wooden Steel

% of total sales 48% 20% 32%
Sales 240,000 100 100,000 100% 160,000 100%
%
- variable exp 72,000 30% 80,000 80% 88,000 55%
CM 168,000 70% 20,000 20% 72,000 45%

Additional budgeted information:

1. Fixed expenses in total is RM223,600
2. Net income in total is RM36,400

REQUIRED:

(a) Calculate the budgeted break-even point in RM sales.

Total sales = 240,000 + 100,000 + 160,000

= RM500,000
Total variable expenses = 72,000 + 80,000 + 88,000
= RM240,000
CM ratio = (500,000 – 240,000) / 500,000
= 52%

Break-even point in RM sales = Fixed expenses / CM ratio

= 223,600 / 52%
= RM430,000

(b) Assume that actual sales for the month total RM500,000 as planned.
Actual sales by product are: plastic, RM160,000; wooden, RM200,000;
and steel, RM140,000. Prepare a contribution income statement for the
month based on actual sales data. Present the income statement in the
format shown above plus with additional column for the total.

Plastic Wooden Steel Total

Sales 160,000 100% 200,000 100% 140,000 100% 500,000 100%
- Variable expense 48,000 30% 160,000 80% 77,000 55% 285,000 57%
CM 112,000 70% 40,000 20% 63,000 45% 215,000 43%
- Fixed expense 223,600
Net operating loss 8,600

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(c) Calculate the break-even sales for the month, based on your actual data.

break-even sales = 223,600 / 43%

= RM520,000

(d) Considering the fact that the company met its RM500,000 sales budget for
the month, the president is shocked at the results shown on your income
statement in (b) above. Prepare a brief memo for the president explaining
why both the operating results and break-even sales are different from
what was budgeted.

Memo to the president:

Although the company met its sales budget of RM500,000 for the month,
the mix of products sold changed substantially from that budgeted. This is
the reason the budgeted net operating income was not met, and the
reason the break-even sales were greater than budgeted. The company’s
sales mix was planned at 48% Plastic, 20% Wooden, and 32% Steel. The
actual sales mix was 32% Plastic, 40% Wooden, and 28% Steel.
As shown by these data, sales shifted away from Plastic, which provides
our greatest contribution per dollar of sales, and shifted strongly toward
Wooden, which provides our least contribution per dollar of sales.
Consequently, although the company met its budgeted level of sales,
these sales provided considerably less contribution margin than we had
planned, with a resulting decrease in net operating income. Notice from
the attached statements that the company’s overall CM ratio was only
43%, as compared to a planned CM ratio of 52%. This also explains why
the break-even point was higher than planned. With less average
contribution margin per dollar of sales, a greater level of sales had to be
achieved to provide sufficient contribution margin to cover fixed costs.

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Exercise 4 (Past Year Exam Semester A191)

In 2019 the Dharma Homeless (DH) had sold 950 lunch coupons at RM65 each
to raise fund for its association. The following report was prepared for the lunch
event in 2019:

Dharma Homeless
Fund Raising Income Statement for 2019
RM
Lunch coupons sales 61,750
Less: cost of foods and drinks for the lunch 37,100
Gross margin 24,650
Less: other cost related to lunch coupons 28,550
Loss (3,900)

The cost of the foods and drinks can be broken down into RM12,400 fixed costs
and the remaining were variable costs. Other cost related to lunch coupons
amounted to RM28,550 of which RM14,300 were fixed and RM14,250 were
variable.

REQUIRED:

(a) Prepare income statement for the year 2019 using the contribution margin
format.
Dharma Homeless
Contribution income statements
Sales 61,750
- Variable expenses (37,100 – 12,400 + 14,250) 38,950
Contribution margin 22,800
- Fixed expenses (12,400 + 14,300) 26,700
Net operating loss 3,900

(b) Determine the number of lunch coupons should have been sold in order to
breakeven in 2019.

Breakeven in unit = Fixed expenses / CM per unit

= 26700 / (22800 / 950)
=26700 / 24
= 1112.5 units
= 1113 units

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(c) Calculate the profit for 2020 if DH is to double the sales of lunch coupons
assuming fixed costs will be the same as last year.

Dharma Homeless
Contribution income statements
Sales (61,750 x 2) 123,500
- Variable expenses (38,950 x 2) 77,900
Contribution margin 45,600
- Fixed expenses (12,400 + 14,300) 26,700
Net operating loss 18,900

Unit sales = (target profit + fixed expenses) / CM unit

1900 = (target profit + 26,700) / 24
45,600 = target profit + 26,700
Target profit = RM18,900

(d) Suggest any TWO (2) alternatives that can reduce the cost of organizing
lunch fund raising program.

1. Reduce food items in the lunch menu

2. Association cooks their own food rather catering
3. Reducing fixed cost by not renting entertainment system for the lunch
program