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CVP Exercise

Angela and Rommel lives in Stockton, California and grown up and have decided to set up a video hiring store
called Buckets. In order to attract customers to hire videos, it is required to have a creative finance and
business plan. The business is situated in a town centre and nearby the Central Business District.

The following are the plans that Angelica and Tommy have thought of:

Plan 1

 Open from 5.30 pm to 10.30 pm.


 Rental Price = $10.50 per video
 Copyright Fee per video = 20% of the video hiring fee
 A KFC takeaway token = $2.50 each
 System Maintenance = $0.50 per video hired.

Plan 2

 Open from 1 pm to 6 pm
 Rental Price = $8.50 per video
 Copyright Fee per video = 20% of the video hiring fee
 A bottle of coke for free = $1.20 each
 System Maintenance = $0.50 per video hired.

Fixed Costs consist of:

o Rent of the building - $50,000


o Wages - $25,000 (15% lower if adopting Plan 2 because the worker is working in day time).
o Depreciation - $4,500
o Maintenance cost - $10,110
o Parking Cost - $5,000 (for Plan 2 only because there is no free parking space during day time).

Angela and Rommel expected 10,000 tapes would be hired out in the first year. However, they have not yet
decided which plan should be adopted because each plan has its positive points and negative points.

REQUIRED:

(a) Calculate the Breakeven quantity and dollar amount for both plans.
(b) Calculate the Contribution Margin at the expected sales volume.
(c) Explain the contribution margin calculated above whether or not be able to cover the fixed costs.
(d) Calculate the number of tapes needs to be hired out for achieving $30,000 profit under both plans.
(e) Calculate the profit for both plans based on the expected number of sales unit.
(f) Construct a CVP analysis graph using the information above for both plans (from 0 units to 20,000
units).
(g) Suggest to Angela and Rommel which plan should be adopted. If they are planning of earning $30,000
profit. Your suggestion should include financial and non-financial benefits and costs associate with the
plan you select.
(h) If Rommel chooses Plan 2 and he found only 7,500 tapes were hired out, and the business made a
loss. Suggest TWO possible ways that Rommel can do to overcome the loss situation (i.e. to achieve
breakeven).