Question

CVP Activity
1. A friend came to you for financial advice. He is about to set up a business manufacturing and selling handbags for children. He provides you with the following budgeted information concerning his total costs.

Material Cost $ 280,000
Labour Cost 300,000
Production Overhead 150,000
Selling & Distribution Overhead 140,000
Administrative Overhead 60,000

The above figures are based on budgeted production of 3,500 handbags. The budgeted price per bag is $300

You ascertain that $125,000 of labour costs, 100% of administrative overheads, 30% of production overheads and 50% of selling & distribution overheads are fixed in nature. All other costs are variable with the level of production.

a) What is the contribution per handbag
b) Calculate the break- even point in units & in sales dollars using the equation and the contribution margin technique.
c) Construct a break-even chart clearly showing the breakeven point in units and sales revenues as well as the margin of safety in units and dollars at the budgeted level of production.
d) Prepare a marginal costing statement to prove breakeven in units & dollars
e) Set yourself a targeted net income and calculate the targeted sales units & dollars.

Answer 1

1. Calculation of contribution per handbag:

Sale Price $300

Less: Costs

Material Cost 280,000/3500 = $80

Variable Labour Cost (300,000-125,000)/3500 = 50

Variable Production Overheads (150,000*70%)/3500 = 30

Variable Selling and Distribution Overheads (140,000*50%)/3500 = 20

Contribution per Unit (Sales- Variable Costs) = $120

2.Break- Even point = Total Fixed Costs/Conribution per Unit

= (125,000+60,000+45,000+70,000)/120

2,500 units

Breakeven Point (In terms of Sales Dollars) = 2500*300 = $750,000