ACT 2131 (PJJ)
Tutorial 4
Question 1 : (CVP analysis – H&M 5th edition, Q7)
If the contribution margin increases from 30 to 35 percent of sales, what will happen to
the break-even point, and why will this occur?
Question2: (CVP analysis – H&M 5th edition, 17-11)
CI, produces novelty nail polishes. Each bottle sells for RM 3.60. Variable unit costs are
as follow:
Acrylic base
RM0.75
Pigments
0.38
Other ingredients
0.35
Bottle, packing material 1.15
Selling commission
0.25
Fixed overhead costs are RM 12,000 per year. Fixed selling and administrative costs are
RM 6,720 per year. The company sold 35,000 bottles last year.
Required:
1. What is the contribution margin per unit for a bottle of nail polish? What is the
contribution margin ration?
2. How many bottles must be sold to break even? What is the break-even sales
revenue?
3. What was CI’s operating income last year?
4. What was the margin of safety?
5. Suppose that CI raises the price to RM4.00 per bottle, but anticipated sales will
drop to 30,400 bottles. What will the new break-even point in units be? Should
CI raise the price? Explain.
Question 3: (CVP analysis – H&M 5th edition, 17-18)
GI is a manufacturer of exercise equipment. The budgeted income statement for the
coming year is as follows.
RM
Sales
900,000
Less: Variable expenses
342,000
Contribution margin
558,000
Less: Fixed expenses
363,537
Income before taxes
194,463
Less: Income taxes
77,785
Net income
116,678
Required:
1. What is GI’s variable cost ration? Its contribution margin ration?
2. Suppose GI’s actual revenues are RM 150,000 greater than budgeted. By how
much will before-tax profits increase? Give the answer without preparing a new
income statement.
3. How much sales revenue must GI earn in order to break even? What is the
expected margin of safety? (Round your answers to the nearest RM).
4. How much sales revenue must GI generates to earn a before-tax profit of
RM200,000? An after-tax profit of RM120,000? Prepare a contribution margin
income statement to verify the accuracy of your last answer.
Solution:
Question 1
The increase in contribution margin ratio means that the amount of every sales dollar
that goes toward covering fixed cost and profit has just gone up. As a result, the breakeven point will go down.
Question 2
1.
Contribution margin per unit = $3.60 – $2.88* = $0.72
*Variable unit cost = $0.75 + $0.38 + $0.35 + $1.15 + $0.25
= $2.88
Contribution margin ratio = $0.72/$3.60 = 0.20
2.
Break-even in units
Break-even in sales
= ($12,000 + $6,720)/$0.72 = 26,000 bottles
= 26,000 × $3.60 = $93,600
or
= ($12,000 + $6,720)/0.20 = $93,600
3.
Sales ($3.60 × 35,000) ............................... $ 126,000
Variable costs ($2.88 × 35,000) .....................100,800
Contribution margin....................................... $ 25,200
Fixed costs ...................................................... 18,720
Operating income............................................ $ 6,480
4.
Margin of safety = $126,000 – $93,600 = $32,400
5.
Break-even in units
= $18,720/($4.00 – $2.88)
= 16,714.3, or 16,715 if rounded to whole units
New operating income
= $4(30,400) – $2.88(30,400) – $18,720
= $121,600 – $87,552 – $18,720
= $15,328
Yes, operating income will increase by $8,848 ($15,328 – $6,480).
Question 3
1.
Variable cost ratio = $342,000/$900,000 = 0.38
Contribution margin ratio = $558,000/$900,000 = 0.62
2.
$150,000 × (0.62) = $93,000
3.
Revenue = ($363,537 + 0)/0.62
0.62 × Revenue = $363,537
Revenue = $586,350
Margin of safety = $900,000 – $586,350 = $313,650
4.
Revenue = ($363,537 + $200,000)/0.62 = $908,931
Operating income = $120,000/(1 – 0.4)* = $200,000
*$77,785/$194,463 = 0.4 tax rate.
Revenue = ($363,537 + $200,000)/0.62 = $908,931
Sales
Less: Variable expenses ($908,931 × 0.38)
Contribution margin
Less: Fixed expenses
Profit before taxes
Taxes ($200,000 × 0.40)
Net income
$ 908,931
345,394
$563,537
363,537
$ 200,000
80,000
$ 120,000