BMAC5203 Accounting For Decision Making and Margin Ratio
Questions:
2. Use the contribution margin ratio approach to compute the dollar revenues needed to earn a monthly target profit of $11,200.
3. Graph AAA’s CVP relationships. Assume that the selling price per unit is $800. Show the breakeven point, the sales revenue line, the fixed cost line, the total cost line, the operating loss area, the operating income area, and the sales in units and dollars when monthly operating income of $11,200 is earned.
4. Suppose that the average revenue AAA earns increases to $2,000 per unit. Compute the new breakeven point in units. How does this affect the breakeven point?
Answers:
|
Statement Showing Calculation of Contribution per unit | |||
|
Particulars |
% on SP |
Amount |
Amount |
|
Sales Price |
|
|
$800.00 |
|
Less: Variable Cost |
|
|
|
|
Sales Person |
9% |
$72.00 |
|
|
Advertising |
11% |
$88.00 |
|
|
Supplies and postage |
4% |
$32.00 |
|
|
Usage fees |
6% |
$48.00 |
|
|
Total variable cost |
|
|
$240.00 |
|
Contribution per unit |
|
|
$560.00 |
|
Contribution Margin ratio |
|
|
70% |
|
Statement showing calculation of Breakeven Point | |
|
Particulars |
Amount |
|
Office Rent |
8000 |
|
Depreciation on office furniture |
1700 |
|
Utilities |
2400 |
|
Special Telephone Line |
1500 |
|
Computerized Services |
2500 |
|
Salary of Sales person |
11900 |
|
Fixed Costs |
$28,000.00 |
|
Contribution per unit |
$560.00 |
|
Breakeven Units |
50.00 |
|
Statement showing calculation of Revenue for targeted profit | |
|
Particulars |
Amount |
|
Fixed Costs (A) |
$28,000.00 |
|
Targeted Profit (B) |
$11,200.00 |
|
Contribution (A+B) |
$39,200.00 |
|
Required Revenue |
$56,000.00 |
The graph above indicates the cost volume price relationship. The sales price is $800 units so as provided earlier in order to earn a profit of $11200 70 units is needed to be sold.
|
Statement Showing Calculation of Contribution per unit | |||
|
Particulars |
% on SP |
Amount |
Amount |
|
Sales Price |
|
|
$2,000.00 |
|
Less: Variable Cost |
|
|
|
|
Sales Person |
9% |
$180.00 |
|
|
Advertising |
11% |
$220.00 |
|
|
Supplies and postage |
4% |
$80.00 |
|
|
Usage fees |
6% |
$120.00 |
|
|
Total variable cost |
|
|
$600.00 |
|
Contribution per unit |
|
|
$1,400.00 |
|
Contribution Margin ratio |
|
|
70% |
It is provided that if the selling price per unit of the product increases then based on the above calculation the increase in selling price has resulted in increase in contribution per unit. The fixed cost remaining the same as a result, the breakeven point has decreased. That means the company has to sell less units to recover the fixed costs. As provided earlier in the current selling price the breakeven point is 50 units. On increase in selling price, the revised breakeven calculation is provided below:
|
Calculation of breakeven Point | |
|
Particulars |
Amount |
|
Fixed Costs |
$28,000.00 |
|
Contribution per unit |
$1,400.00 |
|
Breakeven Units |
20.00 |
|
Breakeven Sales |
$40,000.00 |
|
Calculation of Revised Profit after dropping product C | |||
|
Particulars |
Product A |
Product B |
Total |
|
Sales |
$120,000.00 |
$150,000.00 |
$270,000.00 |
|
Less: |
|
|
|
|
Variable Costs |
$70,000.00 |
$80,000.00 |
$150,000.00 |
|
Contribution (sales –VC) |
$50,000.00 |
$70,000.00 |
$120,000.00 |
|
Less: |
|
|
|
|
Fixed Costs |
$45,000.00 |
$45,000.00 |
$90,000.00 |
|
Net Income (Contribution- Fixed costs) |
$5,000.00 |
$25,000.00 |
$30,000.00 |
The table above indicates the profit of the company if it decides to drop the product C. It can be seen that on dropping the product C the overall profit of the Alpha company has declined from $60000 to $30000. The main reason for the decline in profit is that dropping of product C will not reduce fixed costs and it will be distributed between product A and product B. This will result in decline in the profit of product A and Product B hence the overall profit will decline. Therefore, it can be said that the Product C should be continued because though it was not profitable but the contribution from Product C helped top recover certain portion of the fixed costs hence increasing the overall profit of the company.
|
Safeco Sales Budget | ||||
|
Particulars |
Quarter 1 |
Quarter 2 |
Quarter 3 |
Quarter 4 |
|
Units |
1000 |
1100 |
1200 |
1500 |
|
Sales Price Per unit |
$65.00 |
$65.00 |
$65.00 |
$65.00 |
|
Sales |
$65,000.00 |
$71,500.00 |
$78,000.00 |
$97,500.00 |
|
Safeco Production Budget | ||||
|
Particulars |
Quarter 1 |
Quarter 2 |
Quarter 3 |
Quarter 4 |
|
Sales Unit |
1000 |
1100 |
1200 |
1500 |
|
Closing Inventory (Unit) (10% of next month sales as provided in the question) |
110 |
120 |
150 |
160 |
|
Less |
|
|
|
|
|
Opening Inventory (units) |
0 |
110 |
120 |
150 |
|
Production Units (Sales unit+ Closing inventory –Opening inventory) |
1110 |
1110 |
1230 |
1510 |
|
Safeco Production Cost Budget | ||||
|
Particulars |
Quarter 1 |
Quarter 2 |
Quarter 3 |
Quarter 4 |
|
Direct material |
$17,760.00 |
$17,760.00 |
$19,680.00 |
$24,160.00 |
|
Direct Labor |
$22,200.00 |
$22,200.00 |
$24,600.00 |
$30,200.00 |
|
Production Over head |
$5,000.00 |
$5,000.00 |
$5,000.00 |
$5,000.00 |
|
Total Production Cost |
$44,960.00 |
$44,960.00 |
$49,280.00 |
$59,360.00 |
The above product cost budget is calculated based on the information provided in the question. The per unit cost provided in the question is multiplied with the production unit provided in the previous table to get the answers.
Bibliography
Chintrakarn, P., Jiraporn, P., & Kim, Y. S. (2017). Did Firms Manage Earnings more Aggressively during the Financial Crisis?. International Review of Finance.
Giroux, D., Robichaud, L., Tétreault, S., & Langlois, L. (2013). Competency of Seniors with Dementia to Live Independently and Manage Finance: Synthesis of the Legislation in Quebec. Canadian Review of Social Policy/Revue canadienne de politique sociale, 2(68-69).
Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of managerial finance. Pearson Higher Education AU.
Kasuma, J., Said, S. S., Yacob, Y., Kassim, S. A., Sarkawi, I. M., & Shahrinaz, I. (2017). Managing Risk, Networking and Managing Finance and the Successful of Sarawak Bumiputera Entrepreneur. Advanced Science Letters, 23(8), 7557-7561.
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