Performance Management

CVP ANALYSIS

CVP Analysis
1. A summary of a manufacturing companys budgeted profit statement for its next financial year, when
it expects to be operating at 75 per cent of capacity, is given below.
$
Sales 9,000 units at $32
Less:
Direct materials
Direct wages
Production overhead fixed
Variable

$
288,000

54,000
72,000
42,000
18,000

Gross profit
Less: admin., selling and distribution costs:
fixed
36,000
Variable (sales volume) 27,000
Net profit

186,000
102,000

63,000
39,000

It has been estimated that:

(i)
(ii)

if the selling price per unit were reduced to $28, the increased demand would utilise 90
percent of the companys capacity without any additional advertising expenditure;
to attract sufficient demand to utilise full capacity would require a 15 per cent reduction in
the current selling price and a $5,000 special advertising campaign.

You are required to:

(a) Calculate the breakeven point in units, based on the original budget;
(b) Calculate the profits and breakeven points which would result from each of the two
alternatives and compare them with the original budget.
2. Rite Beverages Co. produces a variety of bottled drinks. The company has classified its
products in to three basic categories:
Brand

A
B
C

Selling price
per unit
$
1.5
1.2
1

Variable
cost per unit
$
1.4
1
0.4

The fixed cost of the company is $37,240 annually and does not change with any change in
mix of total activity level. During 20X1, sales of A accounted for 50% of the companys total
Performance Management by EK

Performance Management

CVP ANALYSIS

sales (in units). Sales of B were four times that of C. Total sales revenue for the year was
$500,000. Moldings
Required:
(a) The break even sales in dollars and units of each product group in 20X1 based on the
actually experienced sales mix.
(b) The amount which could be spent for advertising in 20X2 to increase sales of more
profitable lines, with the company making a profit of one and half times that of 20X1
on the same total sales revenue, and B sales accounting for 50% of sales, C 20% and A
30%.

3. Quadra Electronics assembles and sells three products W, X and Y. The cost per unit
for each product is as follows:

Direct material
Direct Labour
Variable production
overheads
Fixed production overheads

X
$
4,880

Y
$
1,600

Z
$
1,000

4,000
1,360

2,000
480

700
348

1,172

1,290

960

The fixed overheads are worked out on the basis of normal production levels i.e. 15,000;
45,000; and 60,000 units per annum for W, X and Y respectively.
The fixed selling and administrative costs for the next year are expected to be $
71,270,400.
Management estimates that the ratio of sales quantities of W, X and Y shall be 1:3:4 and
selling price per unit shall be Rs. 12,800; Rs. 6,000 and Rs. 3,600 respectively.
Required:
(a) Calculate the number of units of W, X and Y to be sold in order to achieve break
even
(b) Calculate the break even sales in terms of dollars.

Performance Management by EK

Performance Management

CVP ANALYSIS

4. A company produces following three products:

A
$
10
6

Selling price
Variable cost

B
$
8
5

C
$
11
9

Total fixed cost is $200,000

Required:
(a) Calculate the breakeven point in units if the company wants to sell the three products in a
ratio of 5:3:2
(b) Assuming $50,000 of the total fixed cost specifically relates to product A. How many units
of product A would be required to contribute a total of 75,000 towards general fixed cost
and profit?

5. Trauma Hospital records provide the following patient mix for the year:
Methods of payment

Self-pay
Private Insurance
Medicare
Medicaid

Patient Mix %

20
25
30
25

Average daily
Reimbursements Rate
$
120
120
110
100

Average daily variable

cost
$
40
40
40
40

Fixed costs $2,043,000

Required:
(a) Calculate the sales revenue required to achieve breakeven (separately from each payment
method and in total)
(b) What will be the revised breakeven sales revenue if the hospital decides to accept only selfpay and private insurance modes of payment (equally).

Performance Management by EK