PREPARED FOR:-

PROF. DATIN DR. SUZANA SULAIMAN

PREPARED BY:ILI FARHANA BT ISHAK RAMSIAH BT ISMAIL SITI MAZIDAH BT HANIF WAN AINUL ASYIQIN BT WAN MOHD RAZALI 2011852284 2011853756 2011420726 2011299418

QUESTION 1

What are the assumptions implicit in Bill Frenchs determination of his companys break-even point?

ANSWER :-

1. There is just one breakeven point for the firm

2. Sales mix will remain constant 3. Level of fixed and variable costs has been assumed to be unchanged 4. Sales prices will remain constant

QUESTION 2
On the basis of Frenchs revised information, what does next year look like:
a. What is the break-even point?

2 (a).

Assumption for next year

Product A reduce to 400,000 units.

Product C increase to 950,000 units (500,000+200,000+250,000)

Fixed cost per year increase to $720,000 ($60,000 x 12 months) and the difference charged to Product C only. Fixed cost for Product C = $450,000+$720,000 = $1,170,000. Selling price for Product C increase to $4.80.

Formula
Variable cost to sales: Total variable cost Sales revenue Utilization of capacity: Sales volume Sales at full capacity

Break-even point operation: Fixed Cost Contribution/unit

The break-even point for next year

Aggregate Sales at full capacity (units) Sales Vol. (units) Unit sales price Sales revenue Var. Cost/ Unit Contrib./ Unit Total Var. Cost Fixed Cost Profit Ratios: Var. cost to sales Unit contrib. to sales Utiliz. Of capacity 0.4873 0.5127 87.5% 0.75 0.25 20% 0.4167 0.5833 20% 0.3125 0.6875 47.5% 2,000,000 1,750,000 $6.948 $12,160,000 $3.385 3.563 $5,925,000 $3,690,000 $2,545,000 400,000 $10.00 $4,000,000 $7.50 2.50 $3,000,000 $960,000 $40,000 400,000 $9.00 $3,600,000 $3.75 5.25 1,500,000 $1,560,000 $540,000 950,000 $4.80 $4,560,000 $1.50 3.30 1,425,000 $1,170,000 $1,965,000 A B C

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).

To pay extra dividend

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.

Level of operation must be achieved

Dividend (plus bonus div) to be paid Profit to be retained Profit after tax (needed) $450,000 $150,000 $600,000

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

$3,690,000 $1,200,000 $4,890,000

Contribution/ unit BEP/ level of operation must be achieved

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).

To meet the union demands

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.

Level of operation must be achieved

Dividend to be paid Profit to be retained Profit after tax (needed) Profit before tax (after taking into consideration 50% of profit need to be paid to government) = 450,000 + 450,000 Unit sales price Variable Cost/ Unit Contribution/ Unit Fixed Cost (+) the profit before tax targeted $300,000 $150,000 $450,000 $900,000

6.95 3.72 3.23 $3,690,000 $900,000

Total fixed cost

BEP/ level of operation must be achieved

$4,590,000
1,421,053

QUESTION 2
d. What level of operations must be achieved to meet both dividends and expected union requirements?

2(d). To meet the union demands and expectation dividend

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: $450,000. Profit to be retained is still $150,000.

Level of operation must be achieved

Dividend to be paid Profit to be retained Profit after tax (needed) $300,000 $150,000 $450,000

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

6.95 3.72 3.23

Fixed Cost (+) the profit before tax targeted

Total fixed cost BEP/ level of operation must be achieved

$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

$1,170,000 $4.80 $4,560,000 $1.50

TOTAL VARIABLE COST (950,000 x 1.60)

CONTRIBUTION (4.80 1.50 = 3.30) $3.30x 950,000 units TOTAL NO OF UNITS PRODUCED INVESTMENT THE COMPANY CAN AFFORD (4,560,000+1,425,000+ 1,170,000)

$1,425,000

$3,135,000 950,000 $1,965,000

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

960,000 $10.00 $7.50

1,560,000 $9.00 $3.75

450,000 $2.40 $1.50

$2.50

$5.25

$0.90

BREAK-EVEN POINT

=960,000/2.50 =384,000 unit

@ $3,840,000

=1,560,000/5.25 =450,000/0.90 =297,143 unit =500,000 unit

@$2,674,287 @$1,200,000

 Sum of the three products A+B+C = 1,181,143 units

Not equal to 1,100,000 because: FIXED COST

 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

Is this type of analysis of any value? For what can it be used?

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.