Practice of Cost Volume Profit Analysis/Breakeven Analysis

Question # 1: Cost volume profit analysis constitutes another area of management accounting
that provides management with cost–and–profit data for profit planning, policy formulation and
decision making. How cost volume profit analysis helps accountant for cost-and-profit data
analysis, profit planning, policy formulation and decision making, briefly explain?

Question # 2: Breakeven analysis is a useful technique for mangers, however breakeven

analysis have number of assumptions and limitation.

1. Explain the assumptions of Cost Volume profit analysis

2. Therefore list down the limitations of breakeven analysis.

Question # 3: True and False

1. Contribution margin represents difference between sales price and variable cost.
2. Contribution margin ratio is calculated by dividing contribution margin with sales.
3. Cost volume profit analysis helps to find out the contribution margin by product.
4. Breakeven analysis is a point of sale where there is ______________________
5. At sales to breakeven point; Breakeven sales= Variable cost + Fixed cost.

Question # 3: Suleman limited had sales of Rs. 4,500,000, fixed costs were Rs. 1,200,000 and
variable costs totaled were Rs. 1,800,000.

Required:
1. Contribution margin.
2. Contribution margin ratio.
3. Breakeven point/ Sales to breakeven.

Question # 4: Nouman limited had sales of $ 4,500,000, fixed expenses were $1,200,000 and
variable expenses totaled were $1,800,000.

Required:
4. Contribution margin.
 5. Contribution margin ratio.
6. Breakeven point/ Sales to breakeven.

Question # 5: Following is the data of Ali limited company.

Fixed cost 4000 per month

Variable cost 2.50 per unit
Sales price 5 per unit
Required:
1. Contribution margin per unit.
2. Contribution margin ratio per unit.
3. The breakeven point in units.
4. The breakeven point in dollars.
5. Breakeven in units if Rs.10,000 profit is also required.
6. Sales to breakeven if Rs.10,000 profit is also required.

Question # 6: The Company has the capacity to process 20,000 tons of cotton seed per year.
Sale price is Rs. 200 per ton of cotton. Other data is given below.

Rupees

Cost of cotton seed Variable 80 per ton

Processing cost variable 26 per ton
Marketing cost variable 44 per ton
Fixed cost 340,000 per year
Administrative cost Fixed 300,000 per year

Required:

a. Contribution margin per unit.

b. Contribution margin ratio per unit.
 c. Compute breakeven in units.
d. Compute breakeven in rupees.
e. Breakeven if company wants to earn income of Rs 240,000.

Question # 7: What are the effects on costing with the increase in automation in manufacturing
industry? Enlist the firms other than manufacturing in which cost accounting is applied. The
Pricerite Company presents the following per unit data for two of its products:

Abite Belite
Sales price-------------------------- 15.00 6.75
Variable cost----------------------- 8.00 3.00
Fixed cost--------------------------- 4.00 2.75
Profit ----------------------------- 3.00 1.00
Units per hour--------------------- 10 25

Required:
1) For each products rounding answer to two decimal places:
Contribution margin per hour.
2) Unit contribution margin.
3) Profit per hour
4) C/M ratio.
5) Which one is the more profitable product for the company with respect to contribution
margin and profit.

Question # 8: Break-even analysis has been useful in making product mix decisions. To
illustrate a cost analyst assumed the following situation for a company’s three major products:
Products
A B C
Sales price -------------------------- 10.00 8.00 11.00
Variable cost------------------------ 6.00 5.00 9.00
Contribution margin---------------- 4.00 3.00 2.00
Total fixed cost, 200,000

Required:
 1) The break-even point ( in total and for each product) if the three products are sold in
the ratio 4:3:7 units. (Round the C/M ratio to 1/100th of 1%)
2) The new break-even point (in total and for each product) if management decides to
concentrate its sales efforts on Products A with its higher contribution margin,
resulting in a new sales ratio of 6:3:5 units: ( Round the C/M ratio to 1/100th of 1%)

Question # 9: Three companies are producing and selling annually 10,000 units of similar
product at a unit sales price of Rs. 10. The companies have fixed and variable costs as follows:

Company Fixed Cost Variable Cost Per Unit Sale Price Per Unit Annual Sales
A Rs. 20,000 Rs.6 Rs. 10 10,000
B Rs. 40,000 Rs.4 Rs. 10 10,000
C Rs. 60,000 Rs.2 Rs. 10 10,000

Each company decided a price cut, from Rs. 10 to Rs. 8, in the expectation that sales will
increase from 10,000 to 15,000 units per year.

Required:

a) The contribution margin and operating income for each company at the present level of
activity.
b) The contribution margin and operating income for each company after the reduction in
sales price and increase in sales volume.

Question # 10: Break-even analysis has been useful in making product mix decisions. To
illustrate a cost analyst assumed the following situation for a company’s three major products:
Products

A B C
Sales price per unit --------------------------10.00 8.00 11.00
Variable cost per unit------------------------ 6.00 5.00 9.00
Total fixed cost 100,000 50,000 50,000

Required:
a) Contribution margin for each product
b) Contribution margin ratio for each product
c) Units to break-even for each product
d) Sales to break-even in dollars for each product