CAF-03 Cost-volume-profit (CVP) analysis

Chapter 14 Cost-Volume-Profit (CVP) analysis

14.1 Introduction to CVP analysis
CVP analysis stands for cost-volume-profit analysis’. It is used to show how costs and profits change
with changes in the volume of activity. CVP analysis is an application of marginal costing concepts.
It is a study of interrelationships between cost, volume and profit at different levels of activity.
14.2 Assumptions in CVP analysis
▪ Costs are either fixed or variable. The variable cost per unit is the same at all levels of activity
(output and sales). Whereas total fixed costs are a constant amount in each period. Fixed costs
are normally assumed to remain unchanged at all levels of output at least in the short term.
▪ The contribution per unit is constant for each unit sold (of the same product).
▪ The sales price per unit is constant for every unit of product sold; therefore, the contribution to
sales ratio is also a constant value at all levels of sales.
▪ Production volume is equal to sales volume.
▪ Taxation should be ignored for CVP analysis so profit before tax is used in CVP analysis.
▪ Ratio of sales among various products will remain same throughout the period.
14.3 Contribution
Contribution is a key concept. Contribution is measured as sales revenue less variable costs. Profit is
measured as contribution minus fixed costs.
Rs.
Sales (Units sold × sales price per unit) X
Variable costs (Units sold × variable cost price per unit) (X)
Contribution X
Fixed costs (X)
Profit X
Many problems solved using CVP analysis use either contribution per unit (CPU) or the CS
Contribution / Sales (C/S) ratio.
14.4 SINGLE PRODUCT COST VOLUME PROFIT ANALYSIS
When a company sells only one product then single product CVP analysis is used and it may involve
planning about:
(i) Breakeven sales volume
Total fixed cost ∗
BES volume =
Contribution per unit ∗∗
(ii) Sales volume to achieve desired profit before tax
Total fixed cost ∗ + Desired PBT
Sales volume =
Contribution per unit ∗∗
*Total fixed cost includes every fixed cost
** Contribution per unit = Sales price per unit – every variable cost per unit
(iii) Breakeven sales revenue
Total fixed cost
BES Revenue =
Contribution Margin ratio ∗
(iv) Sales Revenue to achieve desired profit before tax
Total fixed cost + Desired PBT
Sales Revenue =
Contribution Margin ratio ∗
(Sale price per unit – Variable cost per unit)
∗ CM ratio =
Sales price per unit
(OR)
(Total Sale revenue – Total Variable costs)
∗ CM ratio =
Total sales revenue
Note: Contribution margin (CM) ratio is also known as Contribution to Sales (CS) ratio or Profit
Volume (PV) ratio.
Crescent College of Accountancy Page 1
CAF-03 Cost-volume-profit (CVP) analysis
(v) Margin of safety
MOS (units) = BS units – BES units
(OR)
MOS (Rs.) = BS Revenue – BES Revenue
(vi) Margin of safety ratio
(BS units – BES units)
MOS ratio =
BS units
(OR)
(BS Revenue – BES Revenue)
MOS ratio =
BS Revenue
(vii) Sale price to achieve desired profit
(Total fixed cost + Total variable cost + Desired PBT)
Sale price per unit =
Sales volume

14.5 MULTI-PRODUCT COST VOLUME PROFIT ANALYSIS

When a company sells more than one product, then multi-product CVP analysis is used and it may
involve planning about:
(i) Breakeven sales volume
Breakeven Sales volume Sales volume to achieve desired profit
Step-1 Weighted average contribution per unit* Step-1 Weighted average contribution per unit*
Step-2 Combined breakeven sales volume Step-2 Combined Sales volume to earn profit
Step-3 Allocation of combined BES volume to Step-3 Allocation of combined sale volume to
each product – if required** each product – if required**
Total contribution of all products
∗ Weighted average contribution per unit =
Total sale volume of all products
** Allocation of combined breakeven sales volume or sales volume to earn profit will be made
according to ratio of sales quantity.
(ii) Sales volume to achieve desired profit before tax

Breakeven Sales revenue Sales Revenue to achieve desired profit

Step-1 Weighted average C/S ratio* Step-1 Weighted average C/S ratio*
Step-2 Combined breakeven sales volume Step-2 Combined Sales revenue to earn profit
Step-3 Allocation of combined BES revenue to Step-3 Allocation of combined sale revenue to
each product – if required** each product – if required**
Total contribution of all products
∗ Weighted average C/S ratio =
Total sale revenue of all products
** Allocation of combined breakeven sales revenue or sales revenue to earn profit will be made
according to ratio of sales revenue.
(iii) Breakeven sales revenue
Margin of safety Margin of safety ratio or margin of safety (%)
(BS units − BES units)
MOS (units) = BS units - BES units MOS ratio =
BS units
(OR) (OR)
(BS Revenue − BES Revenue)
MOS (Rs.) = BS Revenue - BES Revenue MOS ratio =
BS Revenue

Crescent College of Accountancy Page 2

CAF-03 Cost-volume-profit (CVP) analysis

QUESTIONS
Question-1 (Autumn 2003, Q-6)
The Parrot Company sold 150,000 units @ Rs. 30 each, Variable cost is Rs. 20 (Manufacturing Rs. 15 &
Marketing Rs. 5), Fixed Cost is Rs. 1,200,000 annually which occurs evenly throughout the year
(Manufacturing Rs. 800,000 & Marketing Rs. 400,000)
Required:
(i) Breakeven point in units
(ii) Breakeven point in Rupees
(iii) Number of units to be sold to earn profit before tax of Rs. 200,000
(iv) Number of units to be sold to earn after tax profit of Rs. 100,000 if tax rate is 25%
(v) The breakeven point in units if selling price is increased by Rs. 3 and variable cost by Rs. 2 per unit. (10)

Question-2 (Autumn 2002, Q-5)

(a) What is margin of safety? (03)
(b) The fixed cost of an enterprise for the year is Rs. 400,000. The variable cost per unit for a single product
being made is Rs.20. Each units sells at Rs.100.
Required:
(i) Breakeven point. (04)
(ii) If the turnover for the next year is Rs. 800,000, calculate the estimated contribution and profit, assuming
that the cost and selling price remain the same. (04)
(iii) A profit target of Rs. 400,000 has been desired for the next year. Calculate the turnover required to
achieve the desired result. (04)

Question-3 (Autumn 2004, Q-6)

PQR Company manufactures product ‘E’ in 1,000 units batches and sells them in 100 unit packs. Cost data of
the said product is as under:
Raw material 42 kg per unit
Raw material price Rs. 37 per kg for annual buying upto 3.5 million kgs.
Rs. 36.90 per kg for annual buying over 3.5 million kgs.
Direct labour Rs. 850 per unit
Factory Overhead-Variable Rs.300 per unit
Factory Overhead-Fixed Rs. 500,610 per month
Price Rs. 2,862 per unit.
Current production level is 80,000 units per annum, which is 100% of rated capacity of the plant. For any
increase in production, there will be an increase in fixed overhead by Rs. 25,000 per month.
Cost accountant view
Cost accountant of the company is of the view that the company can achieve break-even level at lesser quantity
if production is increased to avail purchase discount of Rs.0.10 per kg.
Required:
Verify the opinion of the Cost Accountant. (10)

Question-4 (Autumn 2005, Q-7)

The Sindh Engineering Company produces a bicycle which sells at Rs. 1,000 per unit. At 80% capacity
utilization which is the normal level of activity, the sales are Rs. 180 million. Costs are as under:
Prime cost per unit Rs.400
Factory indirect cost Rs.30 million (including variable cost Rs.10 million)
Selling costs Rs.25 million (including variable cost Rs.15 million)
Distribution costs Rs.20 million (including variable cost Rs.11 million)
Administration costs Rs.6 million
Commission and discounts are 5% of sales value.

Crescent College of Accountancy Page 3

CAF-03 Cost-volume-profit (CVP) analysis
Required:
(a) Calculate the break-even sales value.
(b) Prepare statements showing sales, costs, net profit and contribution margin at each of the following levels:
(i) at the normal level of activity;
(ii) if unit selling price is reduced by 5% thereby increasing sales and production volume by 10% of
the normal activity level;
(iii) if unit selling price is reduced by 10% thereby increasing sales and production volume by 20% of
the normal activity level. (12)

Question-5 (Autumn 2006, Q-4)

One-way Limited is engaged in manufacturing and sale of socks. The sales of the company are mostly to USA
and European Countries. At the end of the first quarter, the results of operations of the company are as follows:
Rs.
Sales (Rs. 40 per unit) 5,300,000
Less: Material cost 1,987,500
Wages cost 795,000
Variable overhead 397,500
Fixed overhead 848,000
4,028,000
Gross profit 1,272,000
The factory was working at 40% capacity in the first quarter. Management of the company has estimated that
the quantity sold could be doubled next quarter if the selling price was reduced by 15%. The variable costs per
unit will remain the same, but certain administrative changes to cope with the additional volume of work would
increase the fixed overhead by Rs. 15,000.
Required:
(a) Evaluate the management’s proposal. (05)
(b) What quantity would need to be sold next quarter in order to yield a profit of Rs. 2,000,000 if the selling
price was reduced as proposed, variable cost per unit remains the same and fixed overheads increased as
estimated above? (02)
(c) Calculate the selling price needed to achieve a profit of Rs. 2,000,000 if the quantity sold last quarter
cannot be increased, material prices increase by 12%, wage rates increased by 15%, variable overheads
are higher by 10% and fixed overheads increase by Rs. 15,000. (04)

Question-6 (Autumn 2008, Q-5)

Octa Electronics produces and markets a single product. Presently, the product is manufactured in a plant that
relies heavily on direct labour force. Last year, the company sold 5,000 units with the following results:
Rupees
Sales 22,500,000
Less: Variable expenses 13,500,000
Contribution margin 9,000,000
Less: Fixed expenses 6,300,000
Net income 2,700,000
Required:
(a) Compute the break-even point in rupees and the margin of safety. (04)
(b) What would be the contribution margin ratio and the break-even point in number of units if variable cost
increases by Rs. 600 per unit? Also compute the selling price per unit if the company wishes to maintain
the contribution margin ratio achieved during the previous year. (05)
(c) The company is also considering the acquisition of a new automated plant. This would result in the
reduction of variable costs by 50% of the amount computed in (b) above whereas the fixed expenses will
increase by 100%. If the new plant is acquired, how many units will have to be sold next year to earn net
income of Rs. 3,150,000. (03)

Crescent College of Accountancy Page 4

CAF-03 Cost-volume-profit (CVP) analysis
Question-7 (Autumn 2015, Q-3)
The following information pertains to Hope Limited for the latest financial year:
Rupees
Sale price per unit 1,600
Direct Labour per unit 240
Variable cost (other than direct labour) per unit 960
Fixed cost (no labour cost included) 850,000
Volume of sales and production was 6,000 units which represent 80% of normal capacity. The management
of the company is planning to increase wages of direct labour by 15% with effect from next financial year.
Required:
(a) Calculate the number of units to be sold to maintain the current profit if the sales price remains at Rs.
1,600 and the 15% wage increase goes into effect. (02)
(b) The management believes that an additional investment of Rs. 760,000 in machinery (to be depreciated
at 10% annually) will increase total capacity by 25%. Determine the selling price in order to earn a profit
of Rs. 2 million assuming that all units produced at increased capacity can be sold and that the wage
increase goes into effect. (03)
Question-8 (Spring 2005, Q-6)
Gala Promotions Limited is planning a concert in Karachi. The following are the estimated costs of the
proposed concert:
Rs. (000)
Rent of premises 1,300
Advertising 1,000
Printing of tickets 250
Ticket sellers, security 400
Wages of Gala Promotions Limited Personnel employed at the concert 600
Fee of artist 1,000
There are no variable costs of staging the concert. The company is considering a selling price for tickets at
either Rs. 4,000/- or Rs.5,000/- each.
Required:
(i) Calculate the number of tickets which must be sold at each price in order to break-even. (03)
(ii) Recalculate the number of tickets which must be sold at each price in order to break-even, if the artist
agrees to change from fixed fee of Rs. 1 million to a fee equal to 25% of the gross sales proceeds. (04)
(iii) Calculate the level of ticket sales for each price, at which the company would be indifferent as between
the fixed and percentage fee alternative. (04)
(iv) Comment on the factors, which you think, the company might consider in choosing between the fixed fee
and percentage fee alternative. (04)
Question-9 (Spring 2009, Q-6)
A soft drink company is planning to produce mineral water. It is contemplating to purchase a plant with a
capacity of 100,000 bottles a month. For the first year of operation the company expects to sell between 60,000
to 80,000 bottles. The budgeted costs at each of the two levels are as under:
Rupees
Particulars 60,000 bottles 80,000 bottles
Material cost 360,000 480,000
Labour cost 200,000 260,000
Factory overheads 120,000 150,000
Administration expenses 100,000 110,000
The production would be sold through retailers who will receive a commission of 8% of sale price.
Required:
(a) Compute the break-even point in rupees and units, if the company decides to fix the sale price at Rs. 16
per bottle.
(b) Compute the break-even point in units if the company offers a discount of 10% on purchase of 20 bottles
or more, assuming that 20% of the sales will be to buyers who will avail the discount. (16)
Crescent College of Accountancy Page 5
CAF-03 Cost-volume-profit (CVP) analysis
Question-10 (Spring 2011, Q-5)
Emerald Limited (EL) is engaged in the manufacture and sale of a single product. Following statement
summarizes the performance of EL for the first two quarters of the financial year 20X2:
Quarter 1 Quarter 2
Sales volume in units 580,000 540,000
Rs in 000
Sales revenue 493,000 464,400
Cost of Goods sold
Material (197,200) (183,600)
Labour (98,600) (91,800)
Factory overheads (84,660) (80,580)
(380,460) (355,980)
Gross Profit 112,540 108,420
Selling and distribution expenses (26,500) (25,500)
Administrative expenses (23,500) (23,500)
(50,000) (49,000)
Net Profit 62,540 59,420
In the second quarter of the year EL increased the sale price, as a result of which the sales volume and net
profit declined. The management wants to recover the shortfall in profit in the third quarter. In order to achieve
this target, the product manager has suggested a reduction in per unit price by Rs. 15.
The marketing director however, is of the opinion that if the price of the product is reduced further, the field
force can sell 650,000 units in the third quarter. It is estimated that to produce more than 625,000 units the
fixed factory overheads will have to be increased by Rs. 2.5
Required:
(a) Compute the minimum number of units to be sold by EL in quarter 3 at the reduced price, to earn same
level of profit that was earned in quarter 1 and to recover the shortfall in the second quarter profits.
(b) Determine the minimum price which could be charged to maintain the profitability calculated in (a) above,
if EL wants to sell 650,000 units. (14)

Question-11 (Spring 2016, Q-8)

Himalayan Rivers (HR) is planning to install a new plant. Planned production from the plant for the next year
is 150,000 units. Cost of production is estimated as under:
Rs. in million
Direct material 6.00
Direct labour 5.00
Production overheads 10.29
Production overheads include the following:
(i) Factory premises would be acquired on rent at a cost of Rs. 1.8 million per annum.
(ii) Indirect labour has been budgeted at 30% of direct labour cost, 50% of which would be fixed.
(iii) Depreciation of the plant would be Rs. 0.5 million.
(iv) Total power and fuel cost has been budgeted at Rs. 3 million. 80% of power and fuel cost would vary
in accordance with the production.
(v) All remaining production overheads are variable.
The sales and marketing budget includes the following:
(i) Employment of two sales representatives at a monthly salary of Rs. 25,000 each and a sales
commission of 2% on sales achieved.
(ii) Hiring of a delivery van at Rs. 70,000 per month.
(iii) Launching an advertisement campaign at a cost of Rs. 1.5 million.
Required:
Calculate the breakeven sales revenue and quantity for the next year if HR expects to earn a contribution
margin of 40% on sales, net of 2% sales commission. (10)

Crescent College of Accountancy Page 6

CAF-03 Cost-volume-profit (CVP) analysis
Question-12 (Spring 2017, Q-9)
Sword Leather Limited (SLL) produces and sells shoes. The following information pertains to its latest
financial year:
Rs. in million
Sales (62,500 pairs) 187.5
Fixed production overheads 35.0
Fixed selling and distribution overheads 10.0
Variable production cost (in proportion of 40:35:25
for material, labour and overheads respectively) 60% of sale
Variable selling and distribution cost 15% of sale
To increase profitability, SLL has decided to introduce new design shoes and discontinue the existing deigns.
In this regard it has carried out a study whose recommendations are as follows:
(i) Replace the existing fully depreciated plant with a new plant at an estimated cost of
Rs. 50 million. The new plant would:
• reduce material wastage from 10% to 5%;
• decrease direct wages by 5%; and
• increase variable overheads by 6% and fixed overheads by Rs. 15 million (including
depreciation on the new plant).
(ii) Improve efficiency of the staff by paying 1% commission to marketing staff and annual bonus
amounting to Rs. 1.5 million to other staff.
(iii) Introduction of new designs would require an increase in variable selling and distribution cost by 2%.
(iv) Sell the newly designed shoes at 10% higher price.
(v) Maintain finished goods inventory equal to one month’s sale.
Required:
Compute the budgeted production for the first year if the budgeted sale has been determined with the objective
of maintaining 25% margin of safety on sale. (08)

Question-13 (Spring 2021, Q-7)

Fine Limited (FL) is involved in manufacturing and distribution of various consumer products. Following
information pertains to one of its products, FGH for the year ended31 December 2020:
Rs. in ‘000’
Sales (500,000 units) 56,000
Material (Rs. 30 per kg) (22,500)
Skilled labour (Rs. 125 per hour) (10,000)
Semi-skilled labour (Rs. 100 per hour) (5,000)
Production overheads (50% variable) (4,500)
Gross profit 14,000
The management of FL has decided to take following measures with respect toproduction of FGH for the
next year:
(i) Increase production volume by 10% to take advantage of increase in demand.Currently the plant
for FGH is operating at 80% of its capacity.
(ii) Purchase 60% of the material from FL’s associated company that has offered a bulk discount of 5%.
Additional wastage from this material is expected to be 1%.
(iii) Replace 40% of the skilled labour with semi-skilled labour. It is estimated thatsemi-skilled labour
will take 30% more time to do the work of skilled labour.
Impact of inflation on all costs would be 10%.
FL’s management also wants to maintain the same gross profit margin in 2021 as theprevious year.
Required:
Compute the selling price per unit of FGH for the next year. (12)

Crescent College of Accountancy Page 7

CAF-03 Cost-volume-profit (CVP) analysis
Question- 14 (Autumn 2014, Q-2)
Auto Industries Limited (AIL) manufactures auto spare parts. Currently, it is operating at 70% capacity. At
this level, the following information is available:
Break-even sales Rs. 125 million
Margin of safety Rs. 25 million
Contribution margin to sales 20%
AIL is planning to increase capacity utilization through the following measures:
(i) Selling price would be reduced by 5% which is expected to increase sales volume by 30%.
(ii) Increase in sales would require additional investment of Rs. 40 million in distribution vehicles and
working capital. The additional funds would be arranged through a long-term loan at a cost of 15%
per annum. Depreciation on distribution vehicles would be Rs. 5 million.
(iii) As a result of increased production, economies of scale would reduce variable cost per unit by 10%.
Required:
(a) Prepare profit statements under current and proposed scenarios. (07)
(b) Compute break-even sales and margin of safety after taking the above measures. (04)

Question- 15 (Autumn 2010, Q-3)

Naseem (Private) Limited (NPL) is a manufacturer of industrial goods and is launching a new product. The
production will be carried out using existing facilities. However, the capacity of a machine would have to be
increased at a cost of Rs. 3.0 million. The budgeted costs per unit are as under:
Imported material 1.3 kg at Rs. 750 per kg
Local material 0.5 kg at Rs. 150 per kg
Labour 2.0 hours at Rs. 300 per hour
Variable overheads Rs. 200 per labour hour
Selling & administration cost – variable Rs. 359
Other relevant details are as under:
(i) Net weight of each unit of finished product will be 1.6 kg.
(ii) During production, 5% of material input will evaporate. The remaining waste would be disposed off
at a rate of Rs. 80 per kg.
(iii) The cost of existing plant is Rs. 10 million. The rate of depreciation is 10% per annum.
(iv) Administration and other fixed overheads amount to Rs. 150,000 per month. As a result of the
introduction of the new product, these will increase to Rs. 170,000 per month. The management
estimates that 20% of the facilities would be used for the new product.
(v) The company fixes its sale price at variable cost plus 25%.
(vi) Applicable tax rate for the company is 35%.
Required:
Compute the sales quantity of new product and value, required to achieve a targeted increase of Rs. 4.5 million
in after tax profit. (10)

Crescent College of Accountancy Page 8

CAF-03 Cost-volume-profit (CVP) analysis
Question- 16 (Autumn 2010, Q-3)
Digital Industries Limited (DIL) incurred a loss for the year ended 30 June 2017 as it could achieve sales
amounting to Rs. 89.6 million which was 80% of the break-even sales. Contribution margin on the sales was
25%. Variable costs comprised of 45% direct material, 35% direct labour and 20% overheads.
During a discussion on the situation, the Marketing Director was of the view that no increase in sales price
was possible due to severe competition. However, sales volume can be increased by reducing prices. The
Production Director was of the view that since the plant is quite old, the production capacity cannot be
increased beyond the current level of 70%. Accordingly, the management has developed the following plan:
(i) A new plant would be installed whose capacity would be 20% more than installed capacity of the
existing plant. The cost and useful life of the plant is estimated at Rs. 30 million and 10 years
respectively. The funds for the new plant would be arranged through a long-term bank loan at a cost of
10% per annum. Capacity utilization of 85% is planned for the first year of the operation.
The new plant would eliminate existing material wastage which is 5% of the input and reduce direct
labour hours by 8%.
The existing plant was installed fifteen years ago at a cost of Rs. 27 million. It has a remaining useful
life of three years and would be traded in for Rs. 2 million.
DIL depreciates its fixed assets on straight line basis over their estimated useful lives.
(ii) To sell the entire production, selling price would be reduced by 2%.
(iii) Material would be purchased in bulk quantity which would reduce direct material cost by 10%.
(iv) Direct wages would be increased by 8% which would increase production efficiency by 10%.
(v) Impact of inflation on overheads would be 4%.
Required:
Compute the projected sales for the next year and the margin of safety percentage after incorporating the effect
of the above measures. (12)

Question-17 (Autumn 2007, Q-5)

Quadra Electronics assembles and sells three products - W, X and Y. The cost per unit for each product is as
follows:
W X Y
Rupees Rupees Rupees
Direct materials 4,880 1,600 1,000
Direct labour 4,000 2,000 700
Variable overheads 1,360 480 348
Fixed production overheads 1,172 1,290 960
Total cost per unit 11,412 5,370 3,008
The fixed overheads are worked out on the basis of normal production levels i.e 15,000; 45,000; and 60,000
units per annum for W, X and Y respectively. The fixed selling and administrative costs for the next year are
expected to be Rs. 71,270,400. Management estimates that the ratio of sales quantities of W, X and Y shall be
1:3:4 and selling price per unit shall be Rs. 12,800; Rs. 6,000 and Rs. 3,600 respectively.
Required:
(a) Calculate the number of units of W, X and Y to be sold in order to achieve break even.
(b) Calculate the breakeven sales in terms of Rupees. (16)

Crescent College of Accountancy Page 9

CAF-03 Cost-volume-profit (CVP) analysis
Question-18 (Spring 2015, Q-1)
KPK Dairies Limited (KDL) is planning to introduce three energy flavored milk from 1 July 2015. In this
respect, following projections have been made:
C-Plus I-Plus V-Plus
Planned production (No. of packets) 540,000 275,000 185,000
Sales (No. of packets) 425,000 255,000 170,000
Production cost per packet: -------------------- Rupees --------------------
Direct material 100 98 97
Direct labour 15 13 12
Variable overheads 23 19 16
Fixed overheads 25 22 20
Selling and distribution cost per packet:
Variable overheads 12 8 10
Fixed overheads 5 5 5
Total cost per packet 180 165 160
KDL will sell its products through a distributor at a commission of 5% of sale price and expects to earn a
contribution margin of 40% of net sales i.e. sales minus distributor's commission.
Required:
Compute break even sales in packets and rupees, assuming that ratio of quantities sold would be as per
projections. (17)

Question-19 (Spring 2022, Q-4)

Rio Limited (RL) operates donut shops in different parts of Karachi and has average monthly sales of Rs. 4.5
million per shop. RL earns contribution margin of 20%.
RL is now planning to open a shop in Lahore. In this respect, following two rental options are under
consideration:
(i) Annual rent of Rs. 2.52 million payable in advance.
(ii) Monthly rent of Rs. 0.1 million plus 2% commission on total sales, payable at the end of each month.
Additional information:
(i) RL would introduce customized donuts, in addition to the regular range. The price of customized
donuts will be 15% higher than the regular ones.
(ii) Average monthly sales volume of this shop is expected to be 30% higher than existing sales. 20%
of the sales volume will consist of customized donuts.
(iii) Variable costs consist of 75% cost of making regular donuts which would increase by 5% in case
of customized donuts. The remaining variable costs represent packaging cost of all donuts which
is expected to increase by 4%.
(iv) Fixed costs (other than rent) is estimated at Rs. 0.8 million per month.
(v) RL can borrow the required funds at 14% per annum.
Required:
Compute net profit per month and margin of safety percentage under both options and recommend the most
suitable option to RL. (10)

Crescent College of Accountancy Page 10

CAF-03 Cost-volume-profit (CVP) analysis
Question-20 (Spring 2014, Q-6)
Orient Stores Limited (OSL) operates retail outlets at various petrol pumps across the city. The average
monthly performance of these outlets is as under:
Rs. in ‘000
Sales 1,500
Rent expense 50
Other fixed costs 150
OSL earns contribution margin of 15% on items on which retail prices are printed. These items constitute 40%
of the total sales. All other items are sold at the contribution margin of 25%. Sohaib Enterprises (SE) has
offered OSL to establish an outlet at one of its petrol pumps located in a posh area of the city. OSL’s planning
department estimates that:
• At the proposed location, the sales volumes would be 20% lower than average.
• Being a posh area, OSL would be able to charge 10% higher prices on items on which retail prices are
not printed.
• Other fixed costs would be the same as the average of the existing outlets.
Required:
(a) Determine the break-even sales under the assumptions that SE would monthly charge:
Option I: rent of Rs. 75,000
Option II: rent of Rs. 50,000 plus 5% commission on total sales. (14)
(b) Which of the above options would you recommend and why? (02)

Question-21 (Autumn 2023, Q-5)

Khan Corporation Limited (KCL) produces three types of products. Following information pertains to its next
year budget:
Product A Product B Product C
Description
Rs. in million
Sales 1,500 900 600
Direct material (660) (360) (216)
Direct labour (120) (100) (80)
Selling and distribution expenses (150) (120) (100)
Administration and other expenses (all fixed) (90) (54) (36)
Additional information:
(i) The estimated total factory overheads amount to Rs.380 million. All factory overheads are fixed except
the following:
• 75% of the total indirect labour of Rs.40 million varies in proportion to the direct labour.
• 90% of the total power and fuel cost of Rs.100 million varies in proportion to the production.
(ii) Selling and distribution expenses include the following:
• Commission on sales @ 3%, 4% and 5% for products A, B and C respectively.
• Distribution expenses which are estimated at 2% of sales for products A and B, and 4% of sales for
product C.
• All other expenses are fixed.
(iii) The ratio of product-wise sales is expected to remain the same.
Required:
Compute the break-even sales amount for KCL. Also, determine the product-wise break-even sales amount. (08)

Crescent College of Accountancy Page 11