CVP Analysis … Feb 2020

Importanct Calculations

Break even in units = Fixed Cost CM per unit = Sales price - Variable
CM per unit Cost per unit

Break even in Ru;ees = Fixed Cost CM Ratio = CM x 100

CM Ratio Sales

Required Sale in units = Fixed Cost + Desired Profit

CM Per unit

Required Sale in Rs = Fixed Cost + Desired Profit

CM Ratio

Safety Margin = Sale - Breake Even Sale ( in units or in Rs )

MS Ratio % = Safety Margin x 100

Sales

Profit % = CM % x MS %

Q.1 Allied Company

The operating result of year 20x4 of Allied Company is as follows:
Sales Units 25,000
Sales Rs. 360,000
Material cost 72,000
Labour cost 36,000
Factory overhead 100,000
Selling and Admin exp 116,000
324,000
Net Profit 36,000

The CM ratio for the year 20x4 was 60%

Required
1 Calculate margin of safety ratio for the year 20x4. Marks: 5
2 Solve the following independent cases:
a The sales manager is convinced that a 10% reduction in the selling price
combined with a Rs. 70,000 increase in advertising expenditure, would
cause annual sales in units to increase by 20%.
Calculate profit for the year 20x5 (do not prepare income statement)
Marks: 5
b The president feels that it would be unwise to change the selling price.
Instead, he wants to increase the sales commission by Rs. 2.00 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? Marks: 5
1
 c Due to slack in demand the company expects to sell only 19,000 units per
year. An order has been received from a wholesale distributor who wants to
purchase 4,000 units on a special price. What unit price would have to be
quoted to the distributor if the company wants to earn an overall profit of
Rs. 2,000 for the year 20x5? Marks: 5

Q.2 Shabbir Company

The operating result of year 20x4 of Shabbir Company is as follows:
Actual Sales 40,000 units
Rs.
Sales 800,000
Cost of goods sold 600,000
Gross profit 200,000
Selling and admin exp. 120,000
Net profit 80,000

The safety margin for year was 20%

Required
1 Calculate break-even point of the company for the year in units and in
rupees.
2 Solve the following independent cases
a If an automatic plant is purchases then variable cost will be down by 20%
but fixed cost will be increased by Rs. 100,000. The quality of the product
will also be improved resulting a 10% increase in units sold.
What will be the new break-even point in units, margin of safety ratio and
net profit if automatic plant is purchased?
b Target profit for the coming year is set at 25% of sales. To achieve this
target a cost reduction plan is under study that will decrease variable cost
by 5% and fixed cost by 10%.
How many units must be sold next year to achieve target profit?

Q.3 Record of a factory

The following data are obtained from the record of a factory:
Rs. Rs.
Sales 4,000 units & Rs. 25 100,000
Material consumed 40,000
Labour charged 20,000
Variable overhead 10,000
Fixed overhead 18,000 88,000
Net profit 12,000
Required:
Calculate the following:
1 The number of units by selling which the company will neither loss nor gain anything.
2 The sales needed to earn a profit of 20% on sales.
3 The extra units which should be sold to obtain the present profit if it is proposed to
reduce the selling price by 20% .
4 The selling price to be fixed to bring down its break-even point to 800 units under
present condition.
2
Q.4 Khalid Company
Actual result for the year 20x4 of M/s Khalid Company shows break-even point at Rs. 180,000
with 20% margin of safety and net profit Rs. 27,000. They forecast for 20x5 to sell 33,000
units (10% increase) and earn Rs. 40,500. Total fixed expenses, the unit selling price and the
unit variable cost are planned to be same in 20x5 as they were in 20x4.
Required:
1 Prepare income statement using direct costing format for the year 20x4.
2 Prepare projected income statement for the year 20x5.
3 Compute break-even point and margin of safety for the year 20x5.

Q.5 Karsaz Engineering (ICMAP Nov. 2001)

Karsaz Engineering has invested Rs. 1,000,000 in its plant and set a goal of 15% p.a. return
on investment. Fixed cost, presently in the factory is Rs. 400,000 p.a. whereas the variable
cost per unit is Rs. 15. Last year the firm produced and sold 50,000 units at Rs. 25 each and
earned a profit of Rs. 100,000.
How can management achieve its targeted profit by varying different parameters i.e. fixed cost,
variable cost, quantity sold or price per unit.

Q.6 Burgertown
Burgertown is a fast food restaurant established 12 months ago by Anwar Bhatti in the
Tariq Road. As a result of success of the first restaurant, he is currently looking to open
a further restaurant of a similar size in Clifton area. The startup cost of Rs. 2,500,000
for shop fitting and equipment for the first restaurant was provided from the sale of
Anwar Bhutti's former business. This time however, he will require a bank loan. The
manager of the bank has asked for detailed estimates of the costs and expected
returns. Anwar Bhatti has sought your help in preparing a report for the bank manager.
He provides you the following information as a result of his 12 months of business in
Tariq Road.
1 Total number of burgers sold during the year was 260,000 at an average
value of Rs. 27. The total cost of material was Rs., 3,120,000.
2 A combination of full time and part time staff are employed. In busy periods
more staff are called in to work. He provides you the following summary
of the staff wages in the last six months.
Month Cost (Rs.) Burgers sold
7 158,670 21,605
8 133,430 15,025
9 140,270 16,123
10 175,190 26,002
11 186,570 28,310
12 155,390 20,599
3 Other cash expenses for the year, all assumed to be fixed, were as follows:
Rs.
Rent of premises 400,000
Property tax 160,000
Electricity 70,000
Maintenance and cleaning materials 40,000
Miscellaneous 160,000
830,000
3
 4 The cost of shop fitting and equipment for the new Clifton restaurant is
estimated at Rs. 2,500,000. Anwar expects that a total refit will be required
at the end of 10 years. You have already suggested to Anwar that straight
line depreciation would be most appropriate.
5 The interest charge on the proposed bank loan of Rs. 2,500,000 is 12%.
Assume that there is no requirement for working capital.

Required: 1 Using the high low method, calculate the variable labour cost per burger
and the annual fixed labour cost in the Tariq Road restaurant.
2 Calculate
i break-even point in number of burgers and
ii margin of safety ratio
of the Tariq Road restaurant.
3 Assuming the same annual sales and a similar cost behavior pattern
to both restaurants, calculate:
i break-even point in number of burgers and
ii margin of safety ratio
of the proposed Clifton restaurant.

4 Anwar Bhatti feels that the Clifton restaurant will generate significantly higher sales,
than the old one in Tariq Road, if a site close to the main shopping area is chosen.
This however will result in a higher rent of Rs. 1,300,000 in total, but Anwar would
expect the average selling price of a burger to rise to Rs. 29. To compensate for
the additional risk involved he expect the annual profit on the Clifton restaurant
should be Rs. 500,000 higher than the Tariq Road.
Calculate, in percentage term, how many extra burgers would need to be
sold to achieve this higher level of profit. Show all your workings.

Q7 A soft drink company 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 under:
Rupees
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 rupees and units, if the company decides to fix the
sale price at Rs. 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. Marks: 16

4
Q8 Octa Electronics 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:
Rs '000'
Sales 22,500
Less: Variable expenses 13,500
Contribution margin 9,000
Less: Fixed expenses 6,300
Net income 2,700
Required:
(a) Compute the break-even point in rupees and the margin of safety. Marks: 4
(b) What would be the contribution margin ratio and the break-even point in number of units
if variable cost increases by Rs. 600 per unit? Also compute the selling price per unit if
the company wishes to maintain the contribution margin ratio achieved during the
previous year. Marks: 5
(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 Rs. 3,150,000. Marks: 3

Q9 Emerald Limited (EL) is engaged in the manufacture and sale of a single product.
Following statement summarizes the performance of EL for the first two quarters
of the financial year 20X2:
Quarter 1 Quarter 2
Sales volume in units 580,000 540,000
Rs in ‘000
Sales revenue 493,000 464,400
Cost of Goods sold
Material 197,200 183,600
Labour 98,600 91,800
Factory overheads 84,660 80,580
380,460 355,980
Gross Profit 112,540 108,420
Selling and distribution expenses 26,500 25,500
Administrative expenses 23,500 23,500
50,000 49,000
Net Profit 62,540 59,420

In the second quarter of the year EL increased the sale price, as a result of which the
sales volume and net profit declined. The management wants to recover the shortfall
in profit in the third quarter. In order to achieve this target, the product manager has
suggested a reduction in per unit price by Rs. 15.

The marketing director however, is of the opinion that if the price of the product is reduced
further, the field force can sell 650,000 units in the third quarter. It is estimated that to
produce more than 625,000 units the fixed factory overheads will have to be increased
by Rs. 2.5 million.

5
 Required:
(a) Compute the minimum number of units to be sold by EL at the reduced price, to
recover the shortfall in the second quarter profits.

(b) Determine the minimum price which could be charged to maintain the profitability
calculated in (a) above, if EL wants to sell 650,000 units. (14 marks)

Q 10 Global Manufacturing Company produces and sells two products ‘A’ and ‘B’ having
Aug following data for a particular period: Rs. Per Unit
2014
Product A B
Sales revenue 5,000 10,000
Material cost (Rs. 100 per Kg.) 1,000 2,500
Labour cost (Rs. 60 per hour) 1,500 3,000
Variable overhead 500 1,000
Required:
(i) Calculate the following for both the products:
(1) Contribution margin per unit. 1
(2) Material consumption in kgs per unit. 1
(3) Labour hours required to produce one unit. 1
(ii) Which product is more profitable when total sales value is limited? 2
(iii) Comment on the profitability when production capacity is the limiting factor. 2

Q 11 Mars Transportation Company has appointed a management accountant. First assignment

Feb given to her is to analyse company’s cost-volume-profit relationship. The company's
2013 summarized income statement for the last year is as under:
Rupees
Total Trips Per Trip % to Sales
Revenue 2,000 Trips 15,000,000 7,500 100
Less: Variable cost 9,000,000 4,500 60
Contribution margin 6,000,000 3,000 40
Less: Fixed cost 3,000,000 20
Net operating income 3,000,000 20

According to the agreement with local government at least one trip a day is mandatory.
(one year = 360 days)

Required:
Calculate:
(a) Existing break-even in trips and amount. 07

(b) Number of trips needs to be completed to achieve a profit target of Rs. 5,000,000. 04

(c) For next year, the company is planning to purchase a computerized booking system
having cost of Rs. 1,000,000. Company will save 3% of variable cost and Rs. 400,000 of
fixed cost after installation of new system. Calculate break-even in percentage and
amount after installing the new system. 04
6
 Q 12 Pearson Ltd. produces a single product and sells entire output of its production to a single
Feb customer, "TT Stores" who runs a chain of super markets in Karachi, which sells the
2016 product under their own label namely "TT brands". One of the advantages of selling to
a single customer is that Pearson is not incurring marketing costs, but there is a
continuous pressure from TT Stores to reduce the product price consequently, the
margin would be decreased which is already considered thin. As a result, Pearson Ltd. Is
considering selling its entire output directly in the market under the "Pearson art" brand.
It will improve the margin but there will be substantial marketing costs. The income
statement extracted from the cost accounting records for the first quarter 2015 along
with projected income statement for second quarter 2015 of the company based on
sale to "TT brand" is given below:
Sale to TT brand only
2nd Qrt of 2015
1st Qrt of 2015 (Projected)
Sales (Units) 100,000 110,000
Rupees
Sales revenue 5,000,000 5,500,000
Manufacturing costs 3,600,000 3,740,000
Administration costs (all fixed)1,000,000 1,000,000
Profit before taxation 400,000 760,000
Taxation @ 34% 136,000 258,400
Profit after tax 264,000 501,600

For second quarter of 2015 the unit contribution margin on "Pearson art" brand sales is
expected to be 12.5% greater than contribution margin on "TT brand" sales. Pearson Ltd.
will also bear a variable marketing cost of Rs. 8 per unit and fixed marketing cost of
Rs. 300,000 in second quarter.

Required:
(a) Calculate the following for second quarter:
(i) Present variable manufacturing cost per unit for "TT brand" and total fixed mnfg cost.
04
(ii) Per unit selling price for "TT brand". 01
(iii) Per unit selling price for "Pearson art' brand if decided to sell directly.
(b) Calculate the following for second quarter assuming that 100% sales are related to the
"Pearson art" brand: 05
(i) Breakeven point in terms of units and sales value. 03
(ii) Margin of safety in terms of units and sales value. 02

Q 13 Star Sports Company Limited (SSCL) manufactures and sells sports products throughout
Feb 18 the country. SSCL has registered distributors as well as his own chain of stores. The
company is planning to introduce a new sports product in the market. Enough capacity
exists in the company's plant to produce 60,000 units each month. Variable costs to
manufacture and sell one unit would be Rs. 136 and fixed costs would total Rs. 6,800,000
per month.

The Marketing Department predicts that demand for the new product will exceed the
60,000 units that the company is able to produce. Additional production capacity can
7
 be rented from another company at a fixed cost of Rs. 340,000 per month. Variable
costs in the rented facility would be Rs. 148 per unit, due to somewhat less efficient
operations than in the main plant. The product would be sold for Rs. 212 per unit.

Required:
(a) Compute the monthly break-even point for the new product in units and total rupees
sales. (Show all computations) 07

(b) How many units must be sold each month to make a monthly profit of Rs. 1,530,000?

(c) If the Sales Manager receives a sales bonus of Rs. 13 for each unit sold in excess
of the break-even point, how many units must be sold each month to earn a return
of 30% on the company's monthly investment in fixed costs? 04
( Ans: BE Sales Rs 21,266,356)

Q 14 Papersack Limited, a public limited company, produces and sells finest quality hard paper
Aug 19 bags for flour industry. A new product of paper bag has been introduced into the market
by one of its competitors that the company is anxious to produce and sell. The company
has sufficient capacity of producing 100,000 bags per month. The new product of paper
bag will incur a variable manufacturing and selling cost of Rs. 25 per bag and a total fixed
cost of Rs. 1,250,000 per month. The Marketing Department forecasts that demand for
the product will exceed from company's maximum capacity of producing 100,000 bags
per month. Additional manufacturing space can be rented from another company at a
fixed cost of Rs. 75,000 per month. Variable cost for rented facility would cost Rs. 28
per bag because of the less efficient operations that of the main plant. The bag would
be sold for Rs. 36 per bag.

Required:
(a) Calculate the monthly break-even point for the new product of paper bag and the
number of bags required to achieve a target profit of Rs. 250,000. 10

(b) If the Marketing Manager receives a bonus of Rs. 2 for each bag sold in excess of
break-even point, how many units must be sold each month to earn a return of 20%
on the monthly investment in fixed cost? 04