COST ACCOUNTING – A4

COST VOLUME PROFIT ANALYSIS

Prepared By
Henry Touwa [Bachelor of Accounting (Hons), CPA (T) IP)]
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 COST ACCOUNTING TOPIC: COST VOLUME PROFIT ANALYSIS

COST VOLUME PROFIT ANALYSIS

Cost-volume-profit (CVP)/breakeven analysis is the study of the interrelationships between
costs, volume and profit at various levels of activity.

The management of an organisation usually wishes to know the profit likely to be made if the
aimed-for production and sales for the year are achieved. Management may also be interested
to know the following.
(a) The breakeven point which is the activity level at which there is neither profit nor loss.
(b) The amount by which actual sales can fall below anticipated sales, without a loss being
incurred.

CVP-ANALYSIS ASSUMPTIONS (break-even assumption)

▪ everything produced is sold
▪ selling price per unit remain unchanged
▪ variable cost per unit remain unchanged
▪ total fixed cost remain unchanged
▪ a firm produce only a single product
▪ no semi variable cost
▪ no external factors

QUESTION ONE
A company plans to sell 1000 units of product at a price of shs 150/= each over the coming
month. The variable costs of manufacturer will be 50/= per unit and fixed cost for the period
willl be 80,000/=
Required
a. What will be the profit for the month
b. What will profit be if the company charges a price shs 140/= but sales 1020 units as a result
c. What will profit be if the company charges a price of shs 1650/= but sales 9600 units as a
result and variable cost increases by 10%

QUESTION TWO
Frida Mbaga plans to open a new factory. The following data are available for the later plans.
Sales units 1,200 units
Selling price per unit Tshs. 100
Variable Production costs per unit
• Direct materials Tshs. 6
• Direct labor Tshs. 4
• Variable overheads Tshs. 7

Variable Selling and distribution costs per unit

• Sales commission tshs 3

Annual fixed costs

• Production Tshs. 50,000
• Selling and distribution Tshs. 10,000
• Administrative Tshs. 20,000

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 COST ACCOUNTING TOPIC: COST VOLUME PROFIT ANALYSIS

Required to calculate:
a. Variable costs per unit
b. Total fixed costs per annum.
c. The contribution margin per unit.
d. Contribution margin ratio
e. The break even point in units and in sales value (i.e. in shs.)
f. units and in sales value to achieve a profit of shs 10,000
g. The number of units and sales value to achieve after tax profit of shs 10,000 assume tax
rate was 50%
h. The margin of safety in units and in sales value per month
i. Margin of safety ratio

QUESTION THREE
Frida Mbaga plans to open a tea kiosk. The following data are available for the later plans.
Costs per cup of tea
Water Tshs. 2
Milk Tshs. 5
Sugar Tshs. 10
Tea leaves Tshs. 3
Costs of assistant per month Tshs. 50,000
Other overheads per month Tshs. 10,000
City Council kiosk rental per month Tshs. 20,000
Selling price per cup of tea Tshs. 100
Sales units 1,200 units
Required to calculate:
j. Variable costs per cup of tea.
k. Total fixed costs per month.
l. The contribution margin per cup of tea.
m. Contribution margin ratio
n. The break-even point per month in number of cups and in sales value (i.e. in dollar.)
o. The cups of tea per month in units and in sales value to achieve a profit of shs 10,000
p. The margin of safety in number of cups and in sales value per month
q. Margin of safety ratio and interpret the result

QUESTION FOUR
Aneth Nguvava co ltd is a retail firm selling candles; coy meets the firm sells 25000 pieces of
candles each year. The following data is available for Aneth Nguvava co ltd
▪ Selling price per candle shs. 40
▪ Purchase price per candle shs.25
Total annual fixed costs are:-
▪ Salaries shs. 100000
▪ Advertising shs. 40000
▪ Other Fixed costs shs. 100000
▪ Total fixed costs shs. 240,000
Required:
a. The level of profit for next year assuming that the coy meets it sales target.
b. The break even points in units and in Tshs.

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 COST ACCOUNTING TOPIC: COST VOLUME PROFIT ANALYSIS

c. The contribution margin ratio (CMR) and the effect on profit of an increase in sales volume
by 5,000 units.
d. The level of sales in units and Tshs required achieving target profit of Tshs30, 000.
e. Marginal of safety
f. Because of increasing cost purchase price per candle is expected to increase to shs.30 and
fixed costs by shs 20,000. if selling price remain constant, what is BEP and how many units
must be sold to earn a profit of shs. 60,000.

SERVICE FIRM

QUESTION FIVE
Lifetime Escapes generates average revenue of $5,000 per person on its five-day package tours
to wildlife parks in Kenya. The variable costs per person are as follows:
Airfare $1,400
Hotel accommodations 1,100
Meals 300
Ground transportation 100
Park tickets and other costs 800
Total $3,700
Annual fixed costs total $520,000.
1. Calculate the number of package tours that must be sold to break even.
2. Calculate the revenue needed to earn a target operating income of $91,000.
3. If fixed costs increase by $32,000, what decrease in variable cost per person must be achieved
to maintain the breakeven point calculated in requirement 1?

QUESTION SIX
Given the following information.
Year Sales (shs) Profit (shs)
I 240,000 18,000
II 280,000 26,000
Calculate:
(i) Profit volume ratio
(ii) BEP (shs)
(iii) Profit when sales are shs.200,000
(iv) Sales required to earn a profit of 40,000
(v) Marginal of safety in the second year

QUESTION SEVEN
Tingo is involved in manufacturing of one standard product. During two consecutive months
recently their output, sales revenue and costs were as follows:
April May
Sales (units) 150 165
Total sales revenue shs 7,500 shs 8,250
Total costs shs 5,350 shs 5,800
Required
a. Variable costs per unit.

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 COST ACCOUNTING TOPIC: COST VOLUME PROFIT ANALYSIS

b. Total fixed costs per month.

c. The contribution margin per unit.
d. Contribution margin ratio
e. The break even point in units and in sales value (i.e. in shs.) per month
f. The units and shillings to achieve a profit of shs 150 per month
g. The units and in shillings to achieve after tax profit of shs 150 assume tax rate was 40% per
month
h. The margin of safety in units and in sales value in the month of May
i. Margin of safety ratio in the month of April

QUESTION EIGHT
The following information is available for Janet Mlay international
Selling price per unit shs 20
Variable cost per unit shs 12
Total fixed costs shs 560,000
a) W hat is break-even output?
b) What is the profit earned when the output is shs 100,000 units?
c) What should be the output to achieve the target profit of shs 400,000?
d) What are break-even sales in shillings?

QUESTION NINE
Nzali International manufactures a certain product. Its current financial and production figures
are given below:
Unit selling price shs 45
Unit variable overhead shs 20
Fixed costs shs 400,000
Output shs 24,000 units
a) What is Nzali current level of profit
b) What will be the percentage change in profit for the following changes:
i) A 10% increase in output
ii) A 12% increase in unit selling price
iii) A 5% decrease in unit variable cost

QUESTION TEN
Calculate the break-even point in unit and shilling from the following data:
Selling price per unit shs 12
Variable cost per unit shs 7
Total fixed costs shs 50,000
a) What sales (in units) required to earn a pretax income of shs 60,000
b) What sales (in units) required to earn a aftertax income of shs 60,000 if the tax rate is 40%?

QUESTION ELEVEN
Calculate the break-even point in units and rupees from the following data:
Contribution margin ratio 30%
Contribution margin per unit shs 6
Fixed costs per month shs 20,000
If the net profit is shs 60,000 what is the amount of sales in shillings? Assume 0 tax rate.

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 COST ACCOUNTING TOPIC: COST VOLUME PROFIT ANALYSIS

QUESTION TWELVE
The Samson Company produces a special kind of cement which is packed and sold in bags of 20
kg. During the past month its revenue and costs patterns were as follows:
Selling price per bag shs 30
Variable cost per bag shs 16
Fixed costs shs 10,000
Quantity 3,000 bags
Consider each of the following separate:
a) What is the break-even quantity?
b) Assume a 10% increase in production volume. What is the percentage change in profit
c) Assume a 10% increase in selling price. What is the new break-even point?
d) Assume 50% increase in fixed assets. What is the new break-even point?
e) Assume the variable costs increases to shs 20 per bag. What is the new break-even point?

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