Question: CVP ANALYSIS AND RELEVANT COSTING
a. There are three factors that need to be considered when deciding whether certain costs are considered relevant in a short-term decision. Identify and explain each of these three factors.
b.
The following information concerns a business for the past three months.
$ |
|
Sales 15,000 units @ $20 |
300,000 |
Variable costs 15,000 units @ $12 |
180,000 |
Contribution |
120,000 |
Fixed Costs |
150,000 |
Net Loss |
-30,000 |
The managers of this business are concerned about this loss and are needing some help in making decisions on what needs attention to achieve their objectives. They plan to make a profit of $30,000 in the next three months and are considering the following three proposals:
Proposal 1: Launch an advertising campaign which will cost $50,000
Proposal 2: Reduce the selling price to $19
Proposal 3: Reduce variable costs by $1.50 per unit by installing more efficient equipment. This increases fixed costs by $40,000.
required:
i. Calculate the level of sales needed to make a profit of $30,000 under the assumption that none of the three proposals is adopted; and calculate the break-even point under this assumption. Show all workings.
ii.Calculate the level of sales needed to make a profit of $30,000, and the breakeven point, for each of the three proposals using the table below. Show all workings.
Proposal One |
Proposal Two |
Proposal Three |
|
Desired Profit |
30,000 |
30,000 |
30,000 |
Proposal |
|||
Sales (units) |
|||
Breakeven |
|||
iii. Provide a recommendation to the managers, using results from your calculations, as to which of these options will enable them to achieve their desired profit of $30,000 more efficiently. Include in your answer at least one limitation associated with using break-even analysis.
Solution:
1.
2.
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