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QUESTION 1
What are the assumptions implicit in Bill Frenchs determination of his companys break-even point?
ANSWER :-
QUESTION 2
On the basis of Frenchs revised information, what does next year look like:
a. What is the break-even point?
2 (a).
Formula
Variable cost to sales: Total variable cost Sales revenue Utilization of capacity: Sales volume Sales at full capacity
BEP (units)
1,035,688
384,000
297,143
354,545
QUESTION 2
b. What level of operations must be achieved to pay the extra dividend, ignoring union demands?
2(b).
Last year: Profit =$900,000 (divided evenly between government & company $450,000:$450,000) Dividend paid = $300,000 This year: Dividend to be paid = $300,000 + 50% extra = 300,000+150,000 = $450,000 Profit retained = $150,000 Profit (after tax) needed by company = 450,000 + 150,000 = $600,000 Profit (before tax) targeted = $600,000 + $600,000 because the profit will be divided evenly between gov. and co.
Profit before tax (after taking into consideration 50% of profit need to be paid to government) = 600,000 + 600,000
Fixed Cost (+) the profit before tax targeted Total fixed cost
$1200,000
3.563 1,372,439
The profit before tax must be $1,200,000 in order to meet the dividend of $450,000 and retained profit of $150,000., therefore it is considered as fixed cost.
QUESTION 2
c. What level of operations must be achieved to meet the union demands, ignoring bonus dividends?
2(c).
Increase 10% in variable cost Total variable cost = $5,925,000 +10% = $6,517,500 Variable cost per unit = $6,517,500/1,750,000 units = $3.72 Contribution per unit = Selling price - variable cost per unit = 6.95 - 3.72 = 3.23 Dividend maintains as $300,000. Profit to be retained is still $150,000.
$4,590,000
1,421,053
QUESTION 2
d. What level of operations must be achieved to meet both dividends and expected union requirements?
Profit before tax (after taking into consideration 50% of profit need to be paid to government) = 600,000+600,000
Unit sales price Variable Cost/ Unit Contribution/ Unit
$1,200,000
$3,690,000 $1,200,000
$4,890,000 1,513,932
QUESTION 3
Can the break-even analysis help the company to decide whether to alter the existing product emphasis? What can the company afford to invest for additional C capacity?
Breakeven analysis: help the company decide to alter the existing product because it will allow the company to identify which product generates the highest profit.
FIXED COST ( $450,000+$720,000 ) UNIT SALES PRICE SALES REVENUE VARIABLE COST PER UNIT
PRODUCT C
$1,425,000
QUESTION 4
Calculate each of the three products break-even points using the data in Exhibit 3. Why is the sum of these three volumes not equal to the 1,100,000 units aggregate break-even volume?
PRODUCT A
PRODUCT B
PRODUCT C
FIXED COST UNIT SALES PRICE VARIABLE COST PER UNIT CONTRIBUTION UNIT
$2.50
$5.25
$0.90
BREAK-EVEN POINT
This is because, if the product are calculated individually where it ignores the effect of the product mix there is a different in the total amount of BEP. This is where the production of each product is different in values and units that contribute to the fixed costs.
In this product mix, the higher contribution margin in a product will help to cover the fixed costs of the less efficient product because they share the same fixed costs.
QUESTION 5
CVP analysis:
Is a simplified technique for decision making process
Gives the insight to the company on the needs to make the right choices and avoid costly mistakes
provides management with a comprehensive overview of the effects on revenue and costs of all kinds of short term financial changes
By understanding the break-even point concept it enables the company to take a number of strategic decisions
It can be used:
To help understand and formulate the relationship between cost (fixed and variable), output, profit. To determine the most profitable product or service To identify what sales volumes that need to be achieved and sales goals that need to meet by the marketing or sales department. To assists in establishing prices of products or services To assists in analysing how the mix of products affects profits To set sales target and/or price to generate profits. To find out which products are performing well and which are leading to losses To eliminate non value added
Conclusion
Cost Volume Profit (CVP) Analysis and Break Even Analysis is the critical factor in profit planning. As an important part for the company of short term decision making in a business.