Introduction to Management Accounting | 4QQMN502

Week 1 – Introduction and Cost-Volume-Profit Analysis

Tutorial Questions

Question 1

Jane is thinking of starting a business making pancakes from a market stall on Guildford High Street
on Farmers’ market day. The following information applies:
Cost of hiring trailer for 1 day £140
Cost of hiring the space on the High Street for 1 day £160
Estimated sales price £2.2 per regular pancake
Estimated cost of mix to make a regular pancake is £0.2.

Calculate the following:

(a) Break-even in units.
(b) If the target profit is £100 how many pancakes need to be sold?
(c) The margin of safety if 250 pancakes are sold.
(d) What does the selling price per pancake need to be if Jane expects to sell 250 units and wants
to make a profit of £250?
(e) How many additional pancakes need to be sold to cover £100 of advertising expenditure?

Question 2

Lee Enterprises operates in the leisure and entertainment industry and one of its activities is to
promote concerts at locations throughout the world. The company is examining the viability of a
concert in Singapore. Estimated fixed costs are £60,000. These include the fees paid to performers,
the hire of the venue and advertising costs. Variable costs consist of the cost of a pre-packed buffet
that will be provided by a firm of caterers at a price which is currently being negotiated, but it is likely
to be in the region of £10 per ticket sold. The proposed price for the sale of a ticket is £20. The
management of Lee have requested the following information:
(a) The number of tickets that must be sold to break even (that is, the point at which there is
neither a profit nor loss).
(b) How many tickets must be sold to earn £30,000 target profit?
(c) What profit would result if 8,000 tickets were sold?
(d) What selling price would have to be charged to give a profit of £30,000 on sales of 8,000
tickets, fixed costs of £60,000 and variable costs of £10 per ticket?
(e) How many additional tickets must be sold to cover the extra cost of television advertising of
£8,000?
(f) At the price of £20 per ticket, the expected sales would be 8,000 tickets. One of the managers
has suggested that if the selling price per ticket is reduced by 10%, with an extra advertising
cost of £20,000, the sales volume would increase by 30%. Should this option be undertaken?

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 (g) At the price of £20 per ticket, the expected sales would be 8,000 tickets. If Lee Enterprises
pays sale staff a commission of 5% of sales price per ticket, the sales volume is expected to
increase by 2,000 tickets. Should this option be undertaken?

Question 3

Murray Ltd is a company offering corporate packages to major tennis events. The company is
examining the viability of organising a trip to the US open tournament in New York in 20X3. Estimated
fixed costs are £30,000 and this includes advertising in tennis magazines and fees paid for the hire of
a private marquee at the venue.

Variable costs consist of the following:

Return flight to the USA at £600 per person
Entry cost for the event £200 per person
Accommodation at £250 per person
Lunch and tea provided in the marquee at the course £50 per person

The proposed price for the sale of a ticket for 1 person is £1,500.

Required:
(a) The number of tickets that must be sold to break even
(b) How many tickets must be sold to earn a profit of £10,000?
(c) What is the C/S ratio?
(d) What profit would result if 90 tickets were sold?
(e) What is the margin of safety, expressed as a percentage, if 90 tickets are sold?
(f) How many additional tickets must be sold to cover the extra cost of £8,000 of employing a
famous retired tennis player to host the event?
(g) The company decides not to employ the retired tennis player and has established that at a
selling price of £1,500 and with the level of advertising currently planned the expected sales
would be 90 tickets. One of the managers has suggested that if the selling price per ticket was
reduced to £1,450, then the sales would increase to 110 tickets. To guarantee these extra
sales additional magazine advertising expenditure of £1,490 would be needed and each client
would receive a gift box of tennis ball all with the US Open logo on them which would cost the
company £15 per box. For this new strategy you are to calculate:
(i) The new break-even point in units only
(ii) The new margin of safety in units only
(iii) The new forecast profit

(h) Explain briefly if you would recommend the manager’s suggestion be implemented?
(i) Discuss the types of decisions that require knowledge of how costs and revenues vary with
different levels of activity.

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Question 4

Ewing Ltd expects the following income and expenditure in 20X0:

£ £
Sales (20,000 units) 400,000
Direct materials 140,000
Direct wages 90,000
Fixed production overheads 65,000
Variable production overheads 30,000
Administration overheads 50,000
Selling and distribution overheads 45,000
420,000
Profit/(loss) (20,000)

Ewing Ltd has asked you for a financial evaluation of the following proposal advising whether it should
be implemented.

Proposal
Reduce selling price by 5%, which is expected to increase sales volume by 30%.

Question 5

The summarised income statement of Exewye Ltd for last year is as follows:

Sales (40,000 units) 800,000

Direct materials 320,000
Direct wages 160,000
Fixed production overheads 100,000
Variable production overheads 40,000
Administration overheads 120,000
Selling and distribution overheads 70,000
810,000
Profit/(loss) (10,000)

Calculate the current contribution per unit and the break-even sales in units and then evaluate the
following proposals:
(a) Reduce selling price by 5%, increase sales volume by 25%.
(b) Increase wages from £4 per hour to £4.4 per hour as part of a productivity deal. This will
increase sales volume by 20% with additional advertising of 30,000.

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Question 6

Answer the following questions:

Question 7

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