Cost volume profit analysis

World ‘toy marketing the following information for its product as at 30/06/2010

Per unit
Sales price $100
Variable cost 60
Contribution margin $40

Total fixed costs $800,000

Production capacity 50,000 units

Instruction
Answer the following independence question and show computation using the contribution margin
technique to support your answers.

1. Calculate the contribution margin ratio per unit.

Solution: CMR = SP-VC /SP×100
= ($100-$60)/100×100
=40%

2. Calculate the breakeven point in units and in dollars

Solution: BEP

Units Dollars
= Fixed cost =FC
CM CMR
=800,000 =$800,000
40 40%/100
=20,000 =2,000,000

3. What is the new breakeven point in units if the variable cost increases by $4, 00?
Solution:
=SP – VC
=100 – (60 + 4)
=100 – 64
=$36
New between point =$800,000
$36
= $22,222
 4. What is the total sale that must be generated for the company to earn a profit of $50,000?
Solution:
Sales (units) = FC + target profit =$800,000+50,000
CM $40
=$21,250

Sales (dollars) =FC +target profit =800,000+50,000

CMR $40%
=2,125,000

5. Using the original data in the problem, compute the act income by preparing a CVP income
statement if the variable decreases by 10% and fixed cost increased by $100,000.
Solution:
Income

Math Statement
Target profit /income =(statement )×CM)-FC Income statement
=(50,000×(100-54)-900,000 Total per units
=50,000×46 – 900,000 Sales $5000,00 $100
=1400,000 less VC $2700,000 $54
CM $2,300,000 $46
Less FC $900,000 $18
$1400,000 $28

100×50,000=5000,000
VC=60 × 0.9 = 54
FC = 800,000 + 100,000 = $900,000
54 ×50,000 =2,700,000

6. Calculate the margin of safe in units and in percentage

MOS = sales (units) – BEP
= 50,000 – 20,000
=30,000
MOS % = MOS (units)
Total units
= 30,000
50,000
=0.6 ×100
= 60%