Question 6.
1
Menlo Company distributes a single product. The company’s sales and expenses for last
month follow:
Total Per Unit
Sales $450,000 $30
Variable expenses 180,000 12
Contribution margin 270,000 $18
Fixed expenses 216,000
Net operating income $54,000
Required:
1. What is the monthly break-even point in unit sales and in dollar sales?
2. What is the total contribution margin at the break-even point?
3. How many units would have to be sold each month to earn a target profit of $90,000?
4. If sales increase by $50,000 per month and there is no change in fixed expenses, by how
much would you expect monthly net operating income to increase?
1
Question 6.2 CVP analysis with limited resources
A business makes three products, A, B and C. all three products require the use of two types
of machine: cutting machines and assembling machines. estimates for next year include the
following:
Fixed cost for next year is expected to total £42,000.
The business has cutting machine capacity of 5,000 hours a year and assembling machine
capacity of 8,000 hours a year.
Required:
(a) state, with supporting workings, which products in which quantities the business should
plan to make next year on the basis of the above information. Hint: First determine which
machines will be a limiting factor (scarce resource).
(b) state the maximum price per product that it would be worth the business paying to a
subcontractor to carry out that part of the work that could not be done internally
2
Case: Decision making using CVP analysis
Amex Sounds Ltd is a small trading company, it purchases the sound devices from
manufacturers and then sells retailers. Most of the products of the company is imported
from abroad. Recently, the company received an offer to distribute CD players from
South Korea, this type of product has not been introduced in the domestic market yet.
Management of the company are considering the acceptance of the offer. Following
are the information on the estimation of the costs and revenues associated with that
offer:
- Market research shows that with the price of $40 per unit, the sales volume of
the first year can be at 9,500 units. This is the most reliable figure for the next
year, considering all factors in the market
- The purchase cost of one unit of product is $19.5, including the cost of delivery
and packaging. This quoted cost will be unchanged for 1 year since the contract
is signed
- Other variable costs are estimated at $3 per units sold
- Current warehouse of the company is in full, if they proceed with the new offer,
company would have to rent new place for this new product line. The estimated
cost of renting new warehouse is $46,000 per year. And the extra salaries for
this new business would be $65,000 per year.
- In addition to all costs above other fixed costs incurred as the result of accepting
this new offer would be $15,000 per year
Requirement:
1. Use the break-even analysis to decide whether the management of the company
accept the new offer or not? Calculate the margin of safety.
2. The marking department of the company comments that if the company increase
the advertising for this type of product, the sales could be improved, they come
up with 2 alternatives as follows:
a. With the cost of advertisement of $14,000 the sales volume could reach
the level of 10,585 units per year
b. If the company spends $30,000 for advertisement the sales could be at
11,500 units per year
Assess these two alternatives, compare between them and with the original plan
