CVP ANALYSIS – Problems

1. A company produces & sells a single product and has the following details

SP/unit – Rs 20

VC/unit – Rs 12

F.Expenses pa – Rs 800000

a. Find PV Ratio & BEP both in units & value

b. What is the sales level required to earn a profit of Rs 100000?

c. What is the profit at the sales value of Rs 60 lacs

d. What is the MOS at the sales level of Rs 60 lacs

e. Find new BES Value if SP is reduced by 10%

2. PERIOD 1 PERIOD 2

Sales 39000 43000

Tot cost 34800 37600

Find VC, FC & Cn

3. A co manufactures gas lighters and sells them at Rs 20 each with a profit of Rs 5 each. It operates at
50% of M/C capacity which is 50000 units. The cost of each lighter is as under:

Direct Material – Rs 6

Direct Labour – Rs 2

Works OH – Rs 5 (50% fixed)

Sales expenses – Rs 2 (25% variable)

It is anticipated that next year material cost will go up by 5%, labour by 20% & Fixed expenses by
10%. There will be no change in the Selling price per unit. The company has received an additional
order (ONE OFF) for 20000 lighters next year. What will be the lowest price it can quote so as to
earn the same profit as current year?
4. Following details were available for a company producing 3 products

PARTICULARS A B C

Sales 100000 150000 250000

Variable costs 90000 100000 150000

Fixed costs 20000 30000 50000

TOTAL COST 110000 130000 200000

PROFIT/LOSS (10000) 20000 50000

As Product A is making loss, it is proposed to discontinue the same. Advise the management on
its decision

5. The total cost of a manufactured component is as under:

Prime Cost -Rs.15 Fixed Overhead – Rs.4.

Variable Overhead – Rs.7 Total Cost – Rs.26

The same part is available in the market at Rs.23. Should the firm make it or buy it?

6. Perfect product Ltd. is currently buying a component from a local supplier at Rs.15 each, the supply
is tending to be irregular. Two proposals are under consideration:

- Buy and install a semi-automatic machine for manufacturing this component, which would
involve an annual fixed cost of Rs. 9 lakhs and a variable cost of Rs. 6 per manufactured
component.

- Buy and install an automatic machine for manufacturing this component, incurring an
annual fixed cost of Rs. 15 lakhs and a variable cost of Rs. 5 per manufactured component.

Determine with necessary computations:

a. The annual volume required, in each case, to justify a switch over from outside purchase to
‘own manufacture’.

b. The annual volume required, to justify selection of the automatic machine instead of the
semi-automatic machine.

c. If the annual requirement of the coming year is expected to be Rs. 5, 00,000 nos. and the
volume is expected to increase rapidly thereafter, would you recommend the automatic or
semi-automatic machine? Justify your recommendation.
7. A paint manufacturing company manufactures 2, 00,000 per annum medium-sized tins of “Spray Lac
Paints” when working at normal capacity. It incurs the following cost of manufacturing per unit:

a. Direct Material – Rs.7.80

b. Direct labour – Rs.2.10

c. Variable OH – Rs.2.50

d. Fixed OH – Rs.4.00

Product Cost 16.40 (Per unit)

Each tin of the product is sold for Rs.21 with variable selling and administrative expenses of 60
paise per tin.

During the next quarter only 10,000 units can be produced and sold. Management plans to shut
down the plant estimating that the fixed manufacturing cost can be reduced to Rs.74, 000 per
quarter.

When the plant is operating, the fixed overheads are incurred at a uniform rate throughout the
year. Additional costs of plant shut-down for the quarter arte estimated at Rs. 14, 000.

You are required:

A) To express your opinion, along with calculations, as to whether the plant should be shut down
during the quarter.

B) To calculate the shut down point for quarter in units of products(i.e. in terms of number of tins)

RELEVANT COSTING – Problems

1. A company has been making a machine to order for a customer, but the customer has gone into
liquidation & there is no prospect of any money being obtained

Costs incurred to date in manufacturing the machine are Rs 50000 & progress payments of Rs 15000
have been received from the customer prior to liquidation

The sales dept has found another company willing to buy the machine for Rs 34000 once it has been
completed

To complete the work the following costs are to be incurred

a. Materials have been bought for Rs 6000. They have no other use & if the machine is not finished
would be sold as scrap for Rs 2000
 b. Further Labour costs would be Rs 8000. Labour is in short supply & if the machine is not finished
the work force would be switched to another job which would earn revenue of Rs 30000 & incur
direct costs(not including direct labour of Rs 12000 & absorbed Fixed OH of Rs 8000)

c. Consultancy fees Rs 4000. If the work is not completed the consultant’s contract would be
cancelled at a cost Rs 1500

d. General Overheads of Rs 8000 would be added to the cost of additional work

Should the new offer be accepted? Prepare a statement showing the economics of the proposition

2. X Ltd has been approached by a customer who would like to a special job to be done for him & is
willing to pay Rs 22000 for it. The job would require following materials

Material Total units Units in stock Book value Realizable Replacement

reqd (Rs/unit) value (Rs/u) cost (Rs/u)

A 1000 0 0 0 6

B 1000 600 2 2.5 5

C 1000 700 3 2.5 4

D 200 200 4 6 9

a. Material B is regularly used by X. and if stocks are required for this job they would need to be
replaced to meet other production demand

b. Materials C &D are in stock because of previous excess purchase and they have restricted use.
No other use could be found for Material C but Material D could be used in another job as
substitute for 300 units of Material E which currently costs Rs 5 per unit& is not in stock

What are the relevant costs of material in deciding whether or not to accept the contract? Assume
all other expenses on this contract to be specially incurred besides relevant material cost is Rs 550