COST VOLUME PROFIT ANALYSIS EXERCISES
QUESTION ONE
Mr Zoo is planning to set up a mini Zoo in Howick.
The following relates to different pricing plans of visiting the zoo and costs of running the zoo.
Pricing Plan 1 - $30 per person (a special pack will be included)
Pricing Plan 2 - $25 per visitor (the special pack not to be included)
Variable Costs per visitor
Special Pack - $8
Zoo Consumables - $7
Zoo Expenses - $2
Total Fixed Costs - $200,000
REQUIRED:
(a)
Study the information above then answer the following questions.
Using the CVP formula, calculate the number of units (and its dollar amount) for achieving
a. Breakeven
b. A profit of $30,000 for both plans.
(b)
Calculate the Contribution Margin ratio for both plans.
(c)
Describe the meaning of Contribution Margin ratio.
(d)
Explain the relationship between Contribution Margin ratio and Number of Breakeven units.
(e)
Explain why it is important to calculate Margin of Safety.
(f)
State TWO examples of fixed cost in relation to the zoo.
(g)
Define Relevant Range.
(h)
Draw a CVP graph and identify the following on the graph (CVP graph template will be provided):
a. Breakeven Point
b. Profit Zone
c.
(i)
Loss Zone
Write a report to Mr Zoo for recommending which pricing plan should be adopted. Your
recommendation should include at least ONE piece of financial and ONE piece of non-financial
information.
QUESTION TWO
Firm and Fun Accounting School teaches students how to become a good accountant. The following relates to
the income and costs analysis for the school:
Fees charged


Senior Accounting Class - $50 per class per student
Junior Accounting Class - $30 per class per student
Costs





Resources - $100 per senior students, $75 per junior students
Teacher - $25,000 per annum (there are 2 teachers in the school. One for senior classes, one for junior
class)
Class Consumables (such as whiteboard markers, worksheets) - $70 per student
Administrative Expenses - $30,000 per annum
Finance Costs - $7,000 per annum
There are 40 lessons in a school year for both senior and junior levels.
Suppose there are 50 senior students and 40 junior students enrolled. Each class is made up of 8 students and
school fees are not refundable.
REQUIRED:
Part A – So Easy
The school plans to accept only senior students next year. The administrative expenses will drop down to
$25,000 per annum. The resources per class will increase to $110 per unit because less amount of bulk buying
incurred.
(a)
(b)
(c)
(d)
(e)
(f)
How many students are needed in order to achieve breakeven.
How many classes need to be taught in order to achieve breakeven.
Suppose the business wants to achieve $25,000 profit at the end of the year, calculate the number of
classes is needed to achieve this.
Calculate the margin of safety (in number of class). There are 50 students enrolled for next year’s
course.
Explain what is margin of safety.
Show the CVP in a graph form (from no student to 70 students) and identify the breakeven point.
Part B – A bit challenging
Using the number of students enrolled to answer the following:
(a)
(b)
(c)
(d)
Draw a CVP diagram to show the Total Revenue and Total Costs.
Has the school achieved breakeven? If NOT, how much revenue is required to achieve breakeven.
Find out how many students (regardless junior or senior students) are required to achieve $25,000 profit.
Calculate the margin of safety ratio using the current enrolment.
Part C – Very Challenging
If you are the manager of the school, would you continue to accept both senior and junior students OR just only
senior students (mentioned in Part A).
Use information from Part A and Part B to answer this question. You should include at least TWO pieces of
financial and TWO pieces of non-financial advantages or disadvantages in your answer.
QUESTION THREE
The following is the CVP diagram for HapPo Toy Store, a toy shop that sells Hippo Toys.
Cost-Volume-Profit Analysis for HapPo Toy Store
$ 35,000.00
TR
$ 30,000.00
TC
Revenue/Costs
$ 25,000.00
$ 20,000.00
$ 15,000.00
$ 10,000.00
FC
$ 5,000.00
$-
Units
0
50
100
150
200
250
300
REQUIRED: Study the above information and answer the following questions.
Level 1 – Straightforward Level
(a)
Show the breakeven point on the graph above.
(b)
State the dollar amount of sales is required to achieve breakeven.
(c)
If the business sold 200 units of toys. Show the Margin of Safety on the graph above.
(d)
Calculate the contribution margin at breakeven point.
(e)
Explain why the Fixed Cost curve shows a straight line.
Level 2 – A bit challenging
(a)
Calculate the variable cost per unit.
(b)
Show the Total Variable Cost curve on the diagram above.
(c)
Calculate the contribution margin per unit.
(d)
State the units of sales are required for achieving $10,000 profit.
(e)
Calculate the sales amount (in dollar) is required for achieving $25,000 profit.
(f)
Explain why the Total Cost curve starts from $5,000.
QUESTION FOUR
Angelica and Tommy are grown up and have decided to set up a video hiring store called Buckets. In order to
attract customers to hire videos, it is required to have a creative business plan. The business is situated in a
town centre and nearby the Central Business District.
The following are the plans that Angelica and Tommy have thought of:
Plan 1

Open from 5.30 pm to 10.30 pm.

Rental Price = $10.50 per video

Copyright Fee per video = 20% of the video hiring fee

A KFC takeaway token = $2.50 each

System Maintenance = $0.50 per video hired.
Plan 2

Open from 1 pm to 6 pm

Rental Price = $8.50 per video

Copyright Fee per video = 20% of the video hiring fee

A bottle of coke for free = $1.20 each

System Maintenance = $0.50 per video hired.
Fixed Costs consist of:
o
Rent of the building - $50,000
o
Wages - $25,000 (15% lower if adopting Plan 2 because the worker is working in day time).
o
Depreciation - $4,500
o
Maintenance cost - $10,110
o
Parking Cost - $5,000 (for Plan 2 only because there is no free parking space during day time).
Angelica and Tommy expected 10,000 tapes would be hired out in the first year. However, they have not yet
decided which plan should be adopted because each plan has its positive points and negative points.
REQUIRED:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
Calculate the Breakeven quantity and dollar amount for both plans.
Calculate the Contribution Margin at the expected sales volume.
Explain the contribution margin calculated above whether or not be able to cover the fixed costs.
Calculate the number of tapes need to be hired out for achieving $30,000 profit under both plans.
Calculate the profit for both plans based on the expected number of sales unit.
Construct a CVP analysis graph using the information above for both plans (from 0 units to 20,000
units).
Suggest to Tommy and Angelica which plan should be adopted. If they are planning of earning $30,000
profit. Your suggestion should include financial and non-financial benefits and costs associate with the
plan you select.
If Tommy chooses Plan 2 and he found only 7,500 tapes were hired out, and the business made a loss.
Suggest TWO possible ways that Tommy can do to overcome the loss situation (i.e. to achieve
breakeven).