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ICAG CLASSES - TEMA ACCOUNTANCY CENTRE

NOTES AND QUESTIONS ON CVP ANALYSIS

Cost – Volume Profit Analysis

It is the analysis of the relationship that exist between cost, revenue and profit when there is a
change in level of activity.
It is the study of the effect on future profit as a result of changes in fixed cost, variable cost, sales
price, quantity and sales mix (CIMA official definite).
The topic is in 3 sections
• CVP on a single product.
• CVP on multiple products.
• Break even chart.

CVP Analysis on a Single Product

Assumptions
1. Costs are categorized into either fixed or variable.
2. Analysis takes place within a relevant given period of time (short run i. within an
accounting year)
3. Applies to a single product or a constant sales mix.
4. Profit is calculated on marginal costing basis
5. Selling price per unit and variable cost per unit are constant within the relevant given
period.
6. Production is equal to sales.

FORMULERS
1. Contribution per unit
Selling Price – Variable Cost
Total Fixed Cost (TFC)
2. 𝐵𝑟𝑒𝑎𝑘𝐸𝑣𝑒𝑛 𝑃𝑜𝑖𝑛𝑡 (𝐵𝐸𝑃) 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠 = Contribution Per Unit (CPU)

At break even, total revenue is equal to total cost.

No profit is made at this point, profit is made when an organization sells beyond the BEP.
Losses are therefore made for all sales below the break-even point.

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TFC
3. 𝐵𝐸𝑃 𝑖𝑛 𝑣𝑎𝑙𝑢𝑒 = C/S 𝑟𝑎𝑡𝑖𝑜

4. BEP in value = BEP in units * Selling Price per unit

Contibution
5. 𝐶/𝑆 𝑟𝑎𝑡𝑖𝑜 = ∗ 100
Sales

TFC + Targeted Profit (TP)

6. 𝑈𝑛𝑖𝑡𝑠 𝑡𝑜 𝑝𝑟𝑜𝑑𝑢𝑐𝑒 𝑡𝑜 𝑎𝑐ℎ𝑖𝑒𝑣𝑒 𝑎 𝑡𝑎𝑟𝑔𝑒𝑡𝑒𝑑 𝑝𝑟𝑜𝑓𝑖𝑡 = CPU

Note that Targeted profit is before tax

TFC + TP before tax

7. 𝑈𝑛𝑖𝑡𝑠 𝑡𝑜 𝑝𝑟𝑜𝑑𝑢𝑐𝑒 𝑡𝑜 𝑎𝑐ℎ𝑖𝑒𝑣𝑒 𝑎 𝑡𝑎𝑟𝑔𝑒𝑡𝑒𝑑 𝑝𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥 = CPU
TP after tax
𝑇𝑎𝑟𝑔𝑒𝑡𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑜𝑓𝑜𝑟𝑒 𝑡𝑎𝑥 = 1−Tax Rate

8. Margin of safety = Budgeted sales – Break Even Sales

Margin of safety is the amount by which planned or current sales exceed the break-even
sales. It is a measure of risk. The higher the MOS the better.

Budget sales – Break Even Sales

9. 𝑀𝑎𝑟𝑔𝑖𝑛 𝑜𝑓 𝑠𝑎𝑓𝑒𝑡𝑦 𝑟𝑎𝑡𝑖𝑜 = ∗ 100
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑠𝑎𝑙𝑒𝑠

Limitations of CVP
• Mixed cost may be difficult to separate.
• Fixed cost, selling price per unit and unit variable cost may not be constant over the
period under consideration.
• Analysis on multiple products is not reliable.

CVP of Multiple Products

For this to be possible the assumptions for a single product must exist including the fact that all
the multiple products should have constant sales mix over the activity period.
Total Fixed Cost
=𝐵𝐸𝑃 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠 = Weighted Average Contribution Per Unit (WACPU)

Total Contribute
𝑊𝐴𝐶𝑃𝑈 = Total units produced or sold for all the products

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Steps for Multiple Product Break Even Point Calculation

• Compute contribution for each product and sum them up.
• Divide total contribution by total units to be produced and sold to get WACPU.
• Divide Total Fixed Cost by WACPU to get B.E.P in units.
• B.E.P for each product will be proportion of the total B.E.P based on sales or points units
of that product.
• Multiply B.E.P in units by Selling Price to get B.E.P in value for each product.

Question 1
Ofin Fabricators produces and markets a single product. Presently the product is manufactured in
a plant that relies heavily on direct labour force. Last year the company sold 5,000 units with the
following results:
GHS
Sales 22,500,000
Less variables expenses 13,500,000
Contribution margin 9,000,000
Fixed expenses 6,300,000
Net income 2,700,000

Required,

a. Compute the break-even point in GHS and margin of safety.

b. Calculate the contribution margin ratio and the break-even point in units if variable cost
per unit increases by GHS 600. Also calculate the selling price per unit if the company
wishes to maintain the contribution margin ratio achieved during the previous year.

c. The company is also considering the acquisition of a new automated plant. This will
result in the reduction of variable costs by 50% of the amount computed in (b) above
where as the fixed expenses will increase by 100%. If the new plant is acquired, how
many units will have to be sold next year to earn net income of GHS 3,150,000?

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Question 2
Akropong limited has a budgeted profit statement for its next financial year when it is expected
to be operating at 75% level of capacity.

GHS GHS
Sales 9,000 units at GHS 32 288,000
Less: Direct materials 54,000
Direct labour 72,000
Production overhead: Fixed 42,000
Variable 18,000 186,000
Gross profit 102,000
Less Administration, selling and distribution costs.
Fixed 36,000
Variable 27,000 63,000
Net profit 39,000

Required, Calculate the following:

i. Break even point in units and in value
ii. The contribution sales ratio
iii. The number of units that must be sold to earn a profit of GHS 52,000
iv. The profit that must be expected if Akropong operated at a full capacity.

Question 3
a) Explain the terms break-even point and margin of safety as used in cost-volume-profit (CVP)
analysis in short term decision marking. (4 marks)

b) Kack Ltd is a company which uses cost-volume-profit analysis for planning and control
decisions. You have been given the following information for the just ended operational period:

Total revenue GH¢3,600,000

The annual total cost GH¢3,510,000
Variable cost GH¢2,700,000

Required:
As the Management Accountant, calculate the following for the use of management in decision
making for the forthcoming period:

i) Variable cost/sales ratio. (1 mark)

ii) Contribution/sales (C/S) ratio. (2 marks)
iii) Break-even sales (in value). (2 marks)

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iv) Margin of safety (in value). (1 mark)

v) Margin of safety (in percentage). (1 mark)
vi) The sales value which would yield a profit of GH¢270,000 assuming the C/S ratio and fixed
costs remain unchanged. (3 marks)
vii) The sales value which would yield a profit of 15% of that sales assuming the C/S ratio and
the fixed costs remain unchanged. (3 marks)
viii) The break-even sales value if total fixed cost are reduced by GH¢180,000 whiles selling
price is reduced by 10%, assuming no changes in variable costs ratio. (3 marks)
ICAG NOV 2020 PART 1

Question 4
Carina industries sold 150,000 units of its product at GH¢20 per unit. Variable costs are GH¢15
per unit (manufacturing cost of GH¢12 and selling expenses of GH¢3). Fixed cost are incurred
uniformly throughout the year and amount to GH¢972,000, that is, manufacturing costs of
GH¢600,000 and selling expenses of GH¢372,000.
Required:
a. Calculate the break-even point in units and cedi.
b. Calculate the number of units that must be sold to earn an income of GH¢75,000 before
income tax.
c. Calculate the number of units that must be sold to earn an after-tax profit of GH¢100,000
if the income tax rate is 40%

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Question 5.
Graphix Communication Group Limited (GCGL) is a magazine publishing company. It
comprises a number of different divisions, each publishing magazines in a different sector.
GCGL is now considering publishing Financial Magazine. The Financial Magazine market is
very competitive with a number of well-established titles already being published by GCGL’s
competitors.
Financial Magazine is a monthly magazine.
GCGL has therefore commissioned an advertising campaign to launch its Financial Magazine.
The price of the Financial Magazine has been set at full cost plus a mark-up of 20%.

Forecast variable cost per copy of the Financial Magazine:

GH¢
Paper 0.83
Ink See note (i)
Machine cost 0.22
Other variable cost 0.15

The following additional information is available:

i) Each Financial Magazine needs 0.2 liters of ink. However, 10% of the ink input to the printing
process is wasted. Ink costs GH¢5.40 per liter.

ii) In month 1, GCGL expects to sell 50,000 copies of the magazine to new customers at this
price.

iii) After their first month of sales, GCGL expects 90% of first month’s customers to purchase
the Financial Magazine in month 2. After the second month of purchase, GCGL expects to retain
85% of month 2 customers in subsequent months.

iv) As the magazine circulation area increases, sales to additional new customers in month 2 will
be 20% of month 1 sales figure. 90% of this would be retained in month 3.

v) Sales to additional new customers in month 3 would be 30% of month 1 sales figures

vi) Fixed overhead costs are apportioned by GCGL to the Financial Magazines based on first
month sales volume. Total budgeted annual fixed overhead is GH¢18,000,000 and total budgeted
annual magazine sales, including the Financial Magazine, is 12,000,000 copies.

vii) The sales price of the Financial Magazine will remain unchanged throughout the first three
months.

Required:
a) Discuss TWO (2) advantages and TWO (2) disadvantages of the managing director's pricing
strategy in the circumstances described above. (4 marks)

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b) Produce a statement that shows the total profit for the first three months of Financial
Magazine. (10 marks)

c) Calculate the number of copies of the Financial Magazine that need to be sold to achieve a
profit of GH¢100,000. (6 marks)

ICAG NOV. 2019

Question 6.
Komosa Ltd is reviewing the selling price of its product for the coming year. A forecast of the
annual costs that would be incurred by Komosa Ltd in respect of this product at differing activity
levels is as follows:
Annual production (unit) 100,000 160,000 200,000

GH¢000 GH¢000 GH¢000

Direct materials 200 320 400
Direct labour 600 960 1,200
Overhead 880 1,228 1,460

The cost behaviour represented in the above forecast will apply for the whole range of output up
to 300,000 units per annum of this product.
Required:
i) Calculate the total variable cost per unit and total fixed overhead. (4 marks)
ii) State the total cost function. (1 mark)

ICAG MAY 2019

Question 7.
Boasiako Ltd manufactures high quality coffee biscuits that are sold to hotels and restaurants in
Koforidua. Two months ago, it had prepared a budget for the forthcoming financial year.

Details of the budget is presented below:

GH¢
Sales 6,000,000
Less:
Direct materials 2,080,000
Direct labour 1,160,000

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Variable overheads 840,000

Fixed overheads 972,600
Total costs 5,052,600
Profit 947,400

The budget above has been prepared on the assumption that sales will be 800,000 packets of
biscuits. However, due to changing economic conditions, the sales forecast for the year is now
720,000 packets of biscuits. It is expected that selling price per unit, direct costs per unit and
variable overhead cost per unit will not change from those budgeted. It is also expected that fixed
overheads will be the same as those budgeted.
Management is now considering a number of options so as to improve profitability for the
forthcoming financial year:

Option 1:
Decrease the selling price by 20%. It is anticipated that this would increase sales volume by 25%
on the forecast sales for the current year.

Option 2:
Decrease all variable costs by 10% and decrease fixed costs by 10%. This is not expected to have
any impact on the sales level.

Option 3:
Decrease the selling price by 10% and decrease fixed costs by 5%. This is expected to increase
sales volume by 25% on the forecast sales for the current year.

Required:
a) Calculate the expected profit for the current year (forecast sales). (2 marks)
b) Based on the forecast activity for the year, calculate:
i) The breakeven point in packets of biscuits.
ii) The margin of safety in percentage terms.
iii) The sales revenue required to earn a profit of GH¢1,440,000. (6 marks)
c) Evaluate the profitability of the three options and recommend the option that Boasiako Ltd
should adopt. (7 marks)
ICAG MAY 2019

Question 8.
Anima Ventures want to start a new bakery at Bodwease in Ashanti Region. She plans to rent a
store room for her operations under the following terms and conditions.

Option 1 Option 2
Fixed Rent Charge GH¢5,000 GH¢3,000
Variable Rent - 10% of selling price of each loaf

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The following data are also relevant for her business:

GH¢ GH¢
Selling Price 5.00
Material cost: Flour 0.80
Margarine 0.70
Labour cost 0.50

Required:
i) Determine the break-even point in units under each option. (2marks)

ii) Calculate the degree of operating leverage (DOL) for the two options if 10,000 loaves of
bread are to be sold in the current year. (4marks)

iii) What would be the expected operating income if sales increase by 25% next year?
(4marks)

iv) Which of the two options would you recommend to Anima Ventures and? why?
(3marks)
ICAG MAY 2016

Question 9.
Zumah Ltd manufactures and sells two complimentary products: Hyline and Glycerin in the ratio
3:2. The result for the just ended period showed the following:
Product Hyline Glycerin
Selling price (GH¢) 20 15
Contribution/sales ratio (%) 60 40
Profit/ (loss) (GH¢) 97,200 (3,600)

Joint fixed cost of GH¢180,000 are apportioned in proportion to the number of units of each
product sold.

The company is in the process of preparing the budget for the coming year, and is desirous of
improving the performance of Glycerin. Therefore, the following proposals are being considered
for implementation:

i) Increase the price of Glycerin by 25% in expectation that the quantity demanded will reduce
by 10%; or

ii) Retool the production process which will result in a reduction of joint fixed costs by 15% and
an increase in variable costs of each product by 10%; or

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iii) Introduce proposals 1 and 2.

Required:
a) Determine the units of each product sold, and hence, prepare the profit statement for the just
ended period; and (7 marks)
b) Advise the management of Zumah Ltd as to which proposal to implement with the view of
optimizing profits. (8 marks)
ICAG NOV 2017
Question 10.

a) For any cost volume profit analysis to be valid, a number of important assumptions must
reasonably be satisfied within the relevant range. As a management accountant for your
organization, evaluate any four assumptions that must be satisfied in cost-volume-profit analysis.
(4 marks)

b) Anta Limited manufactures and sells Motor King to customers dividend into High Quality,
Medium Quality and Low-Quality motor Kings and categories below:

Sales Price Involved Cost Commission on

sales
GH¢ GH¢ GH¢
High quality 3,400 1,200 80
Medium quality 2,300 1,080 60
Low quality 1,700 690 40

It is on record that sale quantities of Low-Quality Motor King is twice compared to Medium and
High Quality Moto Kings. Annual fixed cost of GH¢310,000 is expected to be incurred.

You are required to:

i. Compute the sales mix. (1 mark)
ii. Compute the unit contribution margin for each brand of Motor King. (4 marks)
iii. Compute the weighted average unit contribution. (4 marks)
iv. Compute break even sales in volume and in sales. (4 marks)
v. How many motor kings should be sold to earn target profit of GH¢15,000?
(3 marks)
ICAG NOV. 2015

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Question 11.
ATM Ltd specializes in the production of tables. The following is the company’s estimated profit
statement for next year, prepared using marginal costing principles.
GH¢ GH¢
Sales 220,000
Less variable costs:
Materials 51,000
Labour 70,000 121,000
Contribution 99,000
Less fixed costs:
Administration 20,000
Others 25,000 45,000
Profit 54,000

Two suggestions have been made in an attempt to improve profit next year.
1. Chief Executive’s Suggestion: I think cheaper materials could be used, which will reduce the
total material cost to GH¢40,000. However, this will mean additional fixed costs of GH¢12,000
to cover inspection of the cheaper materials.

2. Marketing Director’s Suggestion: He suggested that an intensive advertising campaign can

increase sales volume by 20% over the estimated amount above. Variable cost as a percentage of
revenue will be unaffected by this option, but extra fixed costs of GH¢22,500 will be incurred in
order to cover the advertising campaign.

Requirements:
(a) For each of the original estimates, the Chief Executive’s suggestion and the Marketing
Director’s suggestion,

Calculate:
(i) The company’s breakeven points
(ii) The margin of safety as a percentage.

(b) On purely financial grounds, explain whether ATM Ltd should adopt the original plan or
amend it in line with either the Chief Executive’s or Marketing Director’s suggestion. (3 marks)

(c) State and explain two qualitative and two quantitative factors (other than those identified
above) that the company should consider in its decision making. (8 marks)
ICAG NOV. 2014

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Question 12.
A Sports Kit manufacturer, in conjunction with a Software house, is considering the launch of a
new sporting simulator based on video-tapes that enables greater realism to be achieved. Two
proposals are being considered. Both use the same production facilities and, as these are limited,
only one product can be launched.

The following data are the best estimates the firm has been able to obtain:

Football Cricket Simulator

Simulator

Annual volume (units) 40,000 30,000

Selling price (per unit) GHC65 GHC100
Variable cost of production GHC40 GHC50
Fixed production cost GHC300,000 GHC300,000
Fixed selling and
administrative cost GHC225,000 GHC675,000

The higher selling and administrative costs for the cricket simulator reflect the additional
advertising and promotion costs expected to be necessary to sell the more expensive cricket
system.
The firm has a minimum target of GHC100,000 profit per year for new products. The
management recognizes the uncertainty in the above estimates and wish to explore the sensitivity
of the profit on each product to changes in the values of the variables (volume, price, variable
cost per unit and fixed costs).

You are required to calculate for each of the products:

(a) The expected profit from each product (6 marks)

(b) (i) The units to be produced if the targeted profit is GHC100,000

(ii) The unit selling price per product, if the expected profit per year is GHC100,000
(8 marks)

(c) Discuss two (2) qualitative and four (4) quantitative factors which should be considered in
making a choice between the two products (6 marks)
ICAG NOV. 2012

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Question 13.
Ababio Plastic Company produces plastic buckets which are distributed all over the country.
During the years 2009 and 2010, the following data were extracted:

Sales (GHC) Profits (GHC)

Year 2009 1,200,000 80,000
Year 2010 1,400,000 130,000

You are required to calculate the following:

i. Profit –Volume Ratio (P/V Ratio)
ii. Break – Even Point in Sales value
iii. Profit when the sales value is GHC1,800,000
iv. The Sales Value required to make a profit of GHC120,000
v. The Margin of Safety in the Year 2010

10 Marks

b. State three (3) uses of the Cost- Volume- Profit (CVP) Analysis. (3marks)

ICAG MAY 2012

Question 14.
Fameye Ltd produces chairs for schools and churches in Sampa. The information below relates to
sales and profit figures for the years 2008 to 2010.

Year Quantities Sales (GHS) Profit (GHS)

2008 1,500 350,000 70,000
2009 1,700 487,000 60,000
2010 3,000 699,990 209,990

Using the above information provided, compute the following;

i. Variable Cost per Unit
ii. Total variable cost for production of 3,000 chairs
iii. Calculate the total fixed costs

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Question 15.
Santor Limited produces bolt in two branches Kumasi and Takoradi. The following trading results
from the two months are given for the two branches in two months

June 2012 July 2013

Kumasi:
Sales unit 810 960
GHS GHS
Sales unit 583,200 691,200
Cost of sales 561,600 615,600
Profit 21,600 75,600
Takoradi:
Sales unit 780 830
GHS GHS
Sales unit 561,600 597,600
Cost of sales 512,000 532,000
Profit 49,600 65,600
Required
a. Calculate for each of the branches the number of units to be sold to
i. Break even
ii. Make a profit of GHS144,000 per month
b. State which branch would suffer the larger loss if sale fall by 100 units below it breakeven
point.

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Question 16.
Glory limited manufactures and sells three products with the following selling prices and variable
cost:

Product A Product B Product C

GHS/unit GHS/unit GHS/unit
Selling price per unit 3.00 2.45 4.00
Variable cost per unit 1.20 1.67 2.60
The company is considering expenditure on advertising and promotion of product A. it is hoped
that such expenditure, together with a reduction in the selling price of the product, would increase
sale.
Existing annual sales volume of the three products are
Product A 460,000 units
Products B 1,000,000 Units
Products C 380,000 units
If GHS60,000 per annum was to be invested in advertising and sale promotion, sale of product A
at reduced selling prices would be expected to be GHS590,000 units at GHS2.75 per unit or
650,000 units at GHS2.55 per unit. Annual fixed cost is currently GHS1,710,000.
Required
i. Calculate the current break-even sale revenue of the business.
ii. Advice the management of the company as to whether the expenditure on advertising and
sale promotion, together with the proposed selling price reduction should be introduce for
product A.
iii. Calculate the required sale volume of product A at a selling price of GHS2.75 per unit, in
order to justify the expenditure on advertising and sale promotion.
iv. Explain the term ‘margin of safety’ with particular reference to the circumstances of Glory
Limited.

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Question 17.
Quickspray Ltd offers professional car spraying services at Suame Magazine. The company is
planning its activities for the month of June 2018 for its saloon car spraying section. The
company charges service fee of GH¢1,000 and incurs fixed cost (excluding fixed maintenance
cost) and variable cost per unit (excluding variable maintenance cost) of GH¢35,000 and
GH¢644.39 respectively for spraying of a saloon car.

The following data also relates to Quickspray Ltd on the maintenance hours of its key machine,
revenue and profit for the six months ended April 2018.
Period Maintenance Revenue (GH¢) Profit(GH¢)
Hours

November, 2017 1,200 19,000 700

December, 2017 1,425 24,000 1,425

January, 2018 1,410 20,100 650

February, 2018 1,400 20,000 1,000

March, 2018 1,175 18,000 (125)

April, 2018 1,275 19,000 175

Total fixed cost increases by GH¢1,120 when maintenance hours go beyond 1,400.

Required:
a) Determine the total maintenance cost of production, using high-low method if;
i) Maintenance hours of May was budgeted to be 1,520.
ii) Maintenance hours of June is budgeted to be 1,075. (10 marks)

b) Calculate for the month of May the;

i) Break-even point in units and value (4 marks)
ii) Sales level in order to make an after-tax profit of GH¢21,150, assuming Quickspray Ltd is in
the 25% tax bracket. (4 marks)
iii) Margin of safety if the target after-tax profit of GH¢21,150 is achieved. (2 marks)
ICAG NOV 2020

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Question 18.
a. Claudia Footwear (CFW) has developed a new range of high-quality affordable
sandals for beachwear. The sandals are based on an innovative design that
protects feet from the effects of sun, salt and sand. The company has already
received some sales orders for 9,000 sandals which form 75% of the operating
capacity of CFW, and production is due to commence next month. The
Management Accountant has prepared the following projections based on 75%
operating capacity for the trading year ahead:
GH¢ GH¢
Sales
288,000
Direct materials 54,000
Direct wages 72,000
Production overhead (Note 1) 60,000
186,000
Gross profit 102,000

Administration, selling, and distribution costs: (Note 2) 63,000

Net profit 39,000

Notes:
1. Production overhead is made up of fixed and variable costs in the
proportion of 7:3, respectively.
2. GH¢36,000 of the total administration, selling, and distribution costs is
fixed, and the remainder varies with sales volume.

Required:
i) Calculate the breakeven point in units and value.
(4 marks)
ii) Calculate the profit that could be expected if the company operated at full
capacity. (3 marks)

b. In order to enhance profitability, CFW has proposed the following

options:

Option one
If the selling price per unit were reduced by GH¢4, the increase in demand
would utilize 90% of the company’s capacity without any additional
advertising expenditure.

Option two
To attract sufficient demand to utilize full capacity would require a 15%
reduction in the current selling price. In addition, however, CFW would
have to spend GH¢5,000 on a special advertising campaign.

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Option three
To attract sufficient demand to utilize full operating capacity without
changing the selling price per unit, CFW has to spend GH¢35,000 on a
special advertising campaign.

Required:
Present a statement showing the effect of the three alternatives compared
with the original budget and advise management of CFW which of the
FOUR possible plans ought to be adopted (the original budget plan or any
of the three options). (10 marks)

c. State TWO (2) limitations and ONE (1) usefulness of Cost-Volume-Profit

analysis (3 marks) ICAG NOV 2021

Question 19.
Kuntu Ltd manufactures one standard product, the standard marginal cost of which is as follows:
GH¢
Direct material per unit 10.00
Direct wages per unit 7.50
Variable production overhead 1.25
18.75
The budget for the year includes the following:
Output (units) 80,000

GH¢
Total fixed Overheads:
Production 1,000,000
Advertising 600,000
Marketing 500,000

Contribution 2,500,000

In reviewing the budget for the coming year, management is dissatisfied with the results likely to
arise. Emergency board meeting was held to discuss possible strategies to improve the situation
and the following strategies were proposed:

Strategy 1
The Production Manager suggested that the selling price of the product should be reduced by 10%.
This could increase the output by 25%. It is estimated that these changes would result in increase
of fixed production overhead and fixed marketing overhead by GH¢50,000 and GH¢25,000
respectively.

Compiled by Philip Berko, CA, MCIT, Ch.FE, BCom

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Strategy 2
The Director of Finance suggested that the selling price should be increased by 10%.
Additionally, with increase in advertising cost by GH¢400,000, sales units would increase to
90,000 units. It is also estimated that this strategy would increase the fixed production overhead by
GH¢25,000 and marketing overhead by GH¢20,000.

Strategy 3
The Marketing Director suggested that with an appropriate increase in advertising expenditure,
sales could be increased by 20% and a profit on turnover of 15% obtained. It is estimated that
fixed production overhead would increase to GH¢1,040,000 and marketing overhead would
increase by GH¢25,000.

Strategy 4
The Managing Director seeks a profit of GH¢600,000. He would like to know at what selling price
the target profit could be achieved given the following estimates:
An increase in advertising expenditure by GH¢360,000 would result in a 10% increase in sales.
However, fixed production and marketing overheads would increase by GH¢25,000 and
GH¢17,000 respectively

Required:
a. Prepare a forecast profit statement for Strategy 1 and 2. (6 marks)
b. Estimate the additional expenditure on advertisement to achieve results in Strategy 3.
(5marks)
c. Estimate the selling price that is required to achieve a profit of GH¢600,000 in Strategy 4.
(5 marks) ICAG APRIL 2022

Compiled by Philip Berko, CA, MCIT, Ch.FE, BCom