CVP analysis - Questions

Question 1
Ahmad Murad owns and operates a restaurant. His fixed costs are AED 10,500 per month. Luncheons and dinners are served. The average total bill (selling price per meal) is AED 7 per customer. Ahmad's present variable costs average AED 2.80 per meal. Required: 1. How many meals must be served to attain a profit of AED 4,200 per month? 2. What is Ahmad's break-even point in number of meals served per month? 3. Ahmad's rent and his other fixed costs rise to a total of AED 14,700 per month. Assume that variable costs also rise to AED 3.75 per meal. If Ahmad increased his average price to AED 9, how many meals must he now serve to make AED 4,200 profit per month?

Question 2
Sahil Company produces wedding cakes. The company plans to sell 300 cakes in July at 100 AED per cake. Variable costs are estimated at 60 AED per cake. Fixed costs are estimated to be 12,000 AED per month. Required: (a) Prepare a contribution margin income statement. (b) Calculate what the net income would be if Sahil baked 500 cakes in July. (c) Calculate what the net income would be if Sahil baked zero cakes in July. (d) Refer to the original data, calculate what the net income would be if the variable costs increased by 25%. (e) Refer to the original data, calculate what the net income would be if the fixed costs increased by 25%. (f) Refer to the original data, calculate what the net income would be if sales volume increased by 5%. (g) Refer to the original data, calculate what the net income would be if sales volume increased by 10%, selling price decreased by 5%, and variable expenses decreased by AED 4 per unit.

Question 3
Falcon Company is selling a hardware product with a contribution margin of 40% on sales of AED 500,000 per year. The fixed costs are AED 80,000 per year & selling price is AED 10 per unit. (a) Prepare a contribution format income statement. (b) How much increase in net income is expected in the coming year if sales increase by 10,000 units? (c) How much increase in net income is expected in the coming year if sales increase by AED 80,000? (d) The sales manager feels that AED 20,000 increase in the yearly advertising budget would increase annual sales by AED 60,000. Should the advertising budget be increased? (e) The sales manager suggests cutting the present selling price by 10% and increasing the advertising budget by AED 25,000. If these two decisions are made, it is projected that unit sales will go up by 40%. Should this policy be approved?

Question 4
The following information is given for the Gulf Company: Fixed costs AED Variable costs Selling price 30,000 per month 5 per unit 8 per unit

(a) Calculate the break-even sales in units & in dirhams. (b) Calculate the margin of safety in Units, Dirhams, and Percentage at the 12,000 unit sale level. (c) Find the net income when sales are AED 120,000. (d) Compute the sales in units required to produce a net income of AED 30,000.

(e) Calculate sales in units required to produce a net income of 10% of sales. (f) Calculate the increase in net income for AED 50,000 increase in sales.

Question 5
During the past year, Nestor Landscaping Company performed 7,500 hours of service. The following income statement summarizes the results for the year: Nestor Landscaping Company Income Statement For the year ended Dec 31, 2006 Service Revenue Less: Variable Expenses Contribution Margin Less: Fixed Expenses Net Income 142,500 82,500 -------60,000 35,000 -------25,000 ========

Required: (a) Determine the number of hours of service required to break even. (b) Calculate the current margin of safety in units (hours) and dirhams. (c) How many hours of service must be performed at the current price to increase net income by 20%? (d) Should the company rent a new machine having annual rental of AED 5,000, if the machine will reduce variable costs by AED 1.00 per hour? (e) Refer to the original data, what price per hour would be required to produce a profit of AED 50,000 if 10,000 hours of service could be performed?

Question 6
The following information is available for Dr. Alia: Billing cost per hour Variable cost per hour Total fixed costs Required: (a) (b) (c) (d) (e) (f) Calculate the contribution margin per hour. Prepare a contribution format income statement for the month of September in which Alia billed 150 hours. Calculate the break even point in hours and dirhams. Calculate the margin of safety in hours and dirhams if Alia bills 150 hours. How many hours would Alia have to bill in one month in order to earn a profit of AED 10,000? Dr. Alia could lease a new very complex answering machine that would reduce her variable cost per hour to AED110, but would increase her total fixed cost per month to AED 6,000. If she expects to bill an average of 140 hours each month, should she lease the machine? Support your answer with calculations. Give an example of one variable cost and one fixed cost for this type of business. AED 200 AED 120 AED 5,000 per month

(g)

Question 7
Gulf Company manufactures and sells a single product. The company's sales and expenses for a recent month are as follows: Sales volume Selling price per unit Variable cost per unit Total Fixed Expenses Required: (a) Calculate net Income at current sales level. (b) Compute UCM & CMR. (c) Compute break-even point in units and in dirhams. (d) Compute sales in units required to achieve a net income of AED 60,000. (e) Compute margin of safety in units, dirhams, and in percentage. 10,000 Units AED 50 AED 35 AED 120,000

(f) Compute Sales in units required to achieve a net income of 20% of sales. (g) Sales manager feels that by reducing the selling price by 10% & increasing the advertising budget by AED 20,000, unit sales will increase by 50%. Should these changes be made? (h) In an effort to increase sales and profits, management is considering the use of better quality material. This would increase the variable cost by AED 5 per unit, but management could eliminate one quality inspector who is paid a salary of AED 10,000 per month. The sales manager estimates that the higher quality product will increase the monthly sales volume by 20%. Would you recommend that the changes be made? (i) Refer to the original data. Compute the Companys DOL at the present level of sales (10,000 units). Assume that the companys sale can be increased by 8% next month. By what percentage would you expect the net income to increase? Use the operating leverage concept to obtain your answer. Calculate expected net income or loss if sales volume decreases by 10%.