Lecture 24 Practice Questions

Lecture Overview Contribution Margin Method MCQs Test CVP Relationships in Graphic Form CVP Graph Target Profit Analysis The CVP Equation The Contribution Margin Approach The Margin of Safety

Company Oliver located in Karachi manufactures computer casing Company Oliver located in Karachi manufactures computer casing. The firm`s fixed costs are Rs. 4000000 per month while prices are Rs. 3000 and Variable Cost Rs. 2000 each. Company sold 5000 components during the previous year. Requirements Compute the break-even point in units. What will the new break-even point be if fixed costs increase by 10 percent? What was the company`s net income for the prior year? The sales manager believes that a reduction in the sales price to Rs 2500 will result in orders for 1200 more components each year. What will be break-even point be if price is changed? Should the price change discuss in requirement (4) be made?

The Concept of Sales Mix Sales mix is the relative proportions in which a company’s products are sold. Different products have different selling prices, cost structures, and contribution margins. Let’s assume Wind sells bikes and carts and see how we deal with break-even analysis.

Multi-product break-even analysis Wind Bicycle Co. provides the following information: $265,000 $550,00 = 48.2% (rounded)

Multi-product break-even analysis Rounding error

Assumptions of CVP Analysis Selling price is constant throughout the entire relevant range. Costs are linear throughout the entire relevant range. In multi-product companies, the sales mix is constant. In manufacturing companies, inventories do not change (units produced = units sold).

Tim`s Bicycle shop sells speed race bicycles Tim`s Bicycle shop sells speed race bicycles. For purposes of a cost volume profit analysis, the shop owner has divided sales into two categories as follows: Product Type Sales Price Invoice Cost Sales Commissions High Quality $500 $275 $25 Medium Quality 300 135 15 Three quarters of the shop`s sales are medium-quality bikes. The shop`s annual fixed expenses are $65000. (in the following requirements, ignore income tax) Required Compute the unit contribution margin for each product type. What is the shop`s sales mix? Compute the weighted-average unit contribution margin, assuming a constant sales mix What is the shop`s break-even sales volume in dollars? Assume a constant sales mix. How many bicycles of each type must be sold to earn a target net income of $48,750? Assume a constant sales mix.

Compute the unit contribution margin for each product type. Tim`s Bicycle shop sells speed race bicycles. For purposes of a cost volume profit analysis, the shop owner has divided sales into three categories as follows: Product Type Sales Price Invoice Cost Sales Commissions High Quality $500 $275 $25 Medium Quality 300 135 15 Low Quality 150 75 25 Two quarters of the shop`s sales are low-quality bikes and one quarter each to the high quality and medium quality. The shop`s annual fixed expenses are $67500. (In the following requirements, ignore income tax) Required Compute the unit contribution margin for each product type. What is the shop`s sales mix? Compute the weighted-average unit contribution margin, assuming a constant sales mix What is the shop`s break-even sales volume in dollars? Assume a constant sales mix. How many bicycles of each type must be sold to earn a target net income of $50625? Assume a constant sales mix.

Lecture Overview The Concept of Sales Mix Multi-product break-even analysis Assumptions of CVP Analysis

End of Lecture 24