CHAPTER 4

COST VOLUME
PROFIT ANALYSIS

SALWANA SELAMAT
 Learning Outcomes

After completing this chapter,

student should be able to:

Explain the importance of CVP

analysis to the management
Identify and explain the
assumptions of CVP analysis
Calculate and evaluate the
break-even point and the
usefulness of CVP
Construct and analyze the CVP
charts
Explain the usefulness of margin
of safety (MOS)
Determine the break-even for
multi-product
 Contents
4.1 Definition and Importance of Cost-
Volume-Profit Analysis
4.2 The Use of Marginal Costing Income
Statement
4.3 Assumptions and Limitation of CVP
Analysis
4.4 Break-Even Analysis
4.5 Determination of Break-Even Point
4.5.1 Equation Approach
4.5.2 Contribution Approach
4.5.3 Graphical Approach
4.6 Margin of Safety
4.7 Multi-Product CVP Analysis
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4.1 Definition

Cost-Volume-Profit (CVP) analysis is a systematic method of examining the

relationship between changes in volume (level of activity), total sales, expenses
and profit in the short-run.

Kohler defines CVP relationship as “the area of interest within an organization,

of management and accountants in observing and controlling the relationship
between prospective and actual manufacturing costs – both fixed and variable
rates of production and profit”

The importance of CVP Analysis

The objective of cost-volume-profit analysis is to establish what will happen to

the profit if a specified level of activity fluctuates. The CVP analysis helps
management to change any variable in cost-volume-profit relationship and
immediately see the effects of it on the net profit.

This analysis is vital to the management, as volume will influence the total sales
revenue, total costs and profits. Thus, the analysis provides important
information to the internal management in the preparation of:

i. flexible budget,
ii. decision making especially in pricing,
iii. evaluation in the performance of business’s profit, and
iv. costs control and planning

4.2 The use of Marginal Costing Income Statement

The marginal costing income statement supplies the information needed for
CVP analysis. The income statement shows the segregation of cost behavior
pattern into variable and fixed costs, and the determination of the contribution
margin.

4.3 Assumptions and limitations of CVP Analysis

CVP analysis simplifies the real world conditions, which a business will face.
The analysis is based upon a fixed set of condition, indicating a constant and
linear relationship between output, cost and revenue.

However, this is not practical in a real world since the operations of a business
are far from static. But in a short-run, CVP analysis is important as it provides a
useful guide for short-term planning and decision making purposes
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The preparation of CVP analysis is based on the following assumptions and

limitations:

Assumptions

1. The analysis is valid for a certain limited range of activity and for a
limited period of time.
2. The selling price per unit remains constant throughout the period being
considered.
3. All costs can be separated as variable cost and fixed cost with a
reasonable amount of accuracy.
4. The variable costs in total will change proportionately with volume and
the unit variable costs remain constant.
5. The total fixed cost will remain unchanged over certain relevant range of
activity but in unit fixed costs declined as the volume increases.
6. Technology, production method and efficiency remain unchanged.
7. Either a single product is sold, or if a range of products is sold those
sales will be in accordance with a pre-determined sales mix.

Limitations

1. The application of the CVP analysis cannot cope with activity level that
below or above the relevant range defined earlier and not suitable for
period that is more than one year.
2. The analysis gives satisfactory results only if price per unit remain
unchanged which somehow always fluctuate following the market
prices.
3. Separation of mixed costs is hardly can be done and at approximate
amount.
4. Variable cost per unit is unlikely to be constant due to price discount on
raw material purchased or overtime payment on direct labour.
5. Fixed costs tend to change at different level of activity or even in short-
run.
6. The CVP analysis holds to the assumption that production efficiency,
capacity and technology remain constant, but in practice they are not.
7. Difficulty in forecasting profits accurately may encounter for businesses
that having varieties of product.

4. 4 Break-Even Analysis

The study of cost-volume-profit is often done by break-even (BE) analysis. It is

a technique that provides information to the internal management on the impact
of changes in sales and expenses on profit or loss.

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Break-even point is the point of sales where total sales are just enough to cover
the total costs. It is a position where the firm will not make any profit nor
suffer losses. At the break-even point, sales are equal to the total cost and
contribution margin is equal to the total fixed cost.

Break-even point indicates the level of sales that are necessary to avoid losses
and to target for a profit. A business will enjoy profit if sales units are higher
than the break-even sales and suffer losses if sales units are below than that.

4.5 Determination of Break-Even Point

Break-even point can be determined by three approaches:

i. Equation approach
ii. Contribution margin approach
iii. Graphical approach

By using the above approaches, the break-even point can be expressed either in
sales units or sales value.

4.5.1 Equation Approach

The equation approach is based on a marginal costing income statement.

Sales – Total Costs = Net Profit

or

Sales – Variable Costs – Total Fixed Costs = Net Profit

or

Sales = Variable Costs + Total Fixed Costs + Net Profit

Note: At the break-even point, net profit is at zero amount.

4.5.2 Contribution Approach

An alternative method to determine break-even point is by applying the

contribution method approach. Contribution is the amount of revenue
remaining after deducting variable costs. It can be expressed as a value
contribution margin per unit, or a value of total contribution or as a ratio in
percentage.
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Contribution per unit (RM) = Selling price per unit – Variable cost per unit

Total contribution (RM) = Total Sales – Total Variable cost

Contribution sales ratio (%) = Selling price per unit – Variable cost per unit x 100
Selling price per unit

Contribution sales ratio (c/s ratio) also known as profit-volume ratio is a ratio
that shows the relationship between contribution margin and sales. The higher
is the ratio, the bigger will be the portion of contribution out of sales, and hence
the more is the profit.

C/s ratio is always constant regardless of changes level of activity as it was

based on the assumption that unit selling price and unit variable cost are also
constant. Example, a c/s ratio of 45% indicates that for every RM1 of sales, the
value of contribution is at RM0.45.

Formulas for the break-even point by using the contribution approach:

a. Break-even sales (unit) = Total Fixed costs

Contribution Margin per unit

b. Break-even sales (value) = Total Fixed costs

c/s ratio

The break-even analysis can be extended more as to determine the sales level
that is needed in order to earn a target net profit.

The extension of formulas:

c. Sales (unit) to achieve a target profit = Total Fixed costs + Target

profit
Contribution Margin per unit

d. Sales (value) to achieve a target profit = Total Fixed costs + Target

profit
c/s ratio

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The CVP analysis or the ‘What-if’ analysis further can be use to examine the
effects of changes in selling price, sales volume, sales mix and costs in order to
get an acceptable profit.

Illustration 4.1 Break-Even Analysis

Below are data for a month of KWIH Trading, for a single product.

Sales 8,000 units

Selling price RM 2 per unit
Variable cost RM 1 per unit
Annual fixed cost RM 72,000

Average monthly relevant range of production 4,000 – 10,000 units

Required:
1. At what level of sales does KWIH Trading make neither a profit nor a loss?

2. If KWIH Trading desire for RM3,000 net profit, what should be the unit sales?

3. If fixed cost decline by RM1,000 and variable cost reduce by 10%, what is the
effect on the net profit assuming that sales remain constant?

4. What is new selling price, if KWIH Trading target for RM4,000 profit from 8,000
units of sales.

Suggested answers:
1. Equation approach
Sales Revenue = Total Variable cost + Total Fixed costs + Net
profit
RM 2 S* = RM 1S + RM 6,000 + RM 0
RM 1 S* = RM 6,000
S* = 6,000 units
Where S* = sales unit
Contribution approach
Break-even (unit) = Fixed cost
Contribution per unit
= RM 6,000
RM 2 - RM 1
= 6,000 units

2. Sales unit require to achieve target profit of RM3,000:

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Equation approach
Sales = Variable cost + Fixed cost + Net profit
RM 2S = RM 1S + RM 6,000 + RM 3,000
RM 1S = RM 9,000
S = 9,000 units

Contribution approach
Unit sales for target profit = Fixed cost + Target profit
Contribution per unit

= RM 6,000 + RM 3,000
RM 1
= 9,000 units
3. Reduction of RM 1,000 fixed cost and 10% variable cost; the
effect on the net profit:
Equation approach
Net profit = Sales – Variable cost – Fixed cost
= 8,000 (RM2) – 8,000 (RM1 x 90%) – RM
5,000*
= RM 3,800
* RM6,000 – RM1,000 = RM5,000

Contribution approach
Sales = Fixed cost + Net profit
c/s ratio
8,000(RM2) = RM 5,000 + Net profit
(RM 2 – RM 0.9)/RM 2

RM 16,000 = RM 5,000 + Net profit

0.55
Net profit = RM 3,800 per month

4. New selling price at RM 4,000 target net profit:

Sales = Variable cost + Fixed cost + net profit
8,000SP = 8,000(RM1) + RM 6,000 + RM 4,000
SP = RM 2.25

4.5.3 Graphical Approach

Break-even graph or also known as cost-volume-profit chart is a useful tool to

the management as it shows and highlights the CVP relationship over a certain
range of activities. A graphically presentation is not only visualizing the break-
even point, but also the profitability (area of profit and losses) plus the margin
of safety of an entity.
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There are three alternative presentation of break-even graph that are:

i. Break-even graph
ii. Contribution break-even graph
iii. Profit-volume graph

Let’s consider the Illustration 4.1 above for the presentation of graphs.

i. Break-Even Graph
Sequential steps in the preparation of Break-Even Graph:

a. Draw the axis

The horizontal axis is for the unit level of activity and the vertical axis is for the
value of sales revenue and costs.

b. Draw the cost lines

 Fixed cost line (RM 6,000)
It is a line that parallel to the horizontal axis that represents the total
fixed cost that is at the same amount at every level of activity.
 Total costs line [RM 6,000 + RM 1(8,000)]
It is the total of fixed and variable cost where the cost line is drawn
starting from fixed cost point at vertical axis and increasing the amount
to the right by the variable cost at each level of activity. The amount of
the variable cost can be derived from the difference between the total
cost and fixed cost lines at each level of activity.

c. Draw the sales revenue line (RM2 x 8,000)

Plot the total revenue line starting at zero activity level and zero revenue on the
left hand corner and ending on the right side. Note that the revenue line is
assumed to be linear throughout the full range of activity

d. Break-Even Point (BEP)

The Break-Even Point can be determined from the intersection of the total cost
line
and the total revenue line. The BEP in value is found by drawing a horizontal
line from the BEP to the vertical axis (RM12,000), and the BEP in units is
obtained by drawing a vertical line from the BEP to the horizontal axis (6,000
units).

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The Break-Even Graph shows clearly both the area of net profit and net losses.
Thus, the amount of income and loss at each level of sales can be derived from
the total sales and total cost lines.

The BE Graph is a useful tool to the internal management as the effects of a

change in volume sales and costs can be promptly portrayed.

Exhibit 4.1 Break-Even Graph

(RM)
Sales value/ Sales Revenue Line
Costs

Total Costs
18000 Profit
16000

14000
BEP (RM) Total Variable
12000
Costs
BEP
10000

8000
Loss
6000
Total Fixed Costs
4000
Total
2000 Fixed
Costs

2000 4000 6000 8000 10000 12000 Level

of activity
(unit sales) BEP (unit)

ii. Contribution Break-Even Graph

An alternative presentation of BEP graph would be known as Contribution

Break-Even Graph as shown in Exhibit 4.2.
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Exhibit 4.2 Contribution Break-Even Graph

(RM)
Sales Revenue Line
Sales value/
Costs
Total Costs Line

18000 Profit Contribution Margin

16000

14000 Total Fixed

BEP Costs
BEP (RM)
12000

10000
Total Variable Total Variable
8000 Line Costs
Loss
6000

4000

2000

2000 4000 6000 8000 10000 12000 Level of

activity
(unit sales)
BEP (unit)
Sequential steps to be followed in the preparation of Contribution Break-Even
Graph are the same as the Break-Even Graph, except the only difference is that
variable cost line is drawn on the graph instead of fixed cost line that gives
result in contribution. The procedures are:

a. Draw the axis

b. Draw the costs line; variable cost line (RM 1x 8,000 unit) and total
costs line [RM 6,000 + RM 1(8,000)]
c. Draw the sales revenue line (RM2 x 8,000)
The total cost line is drawn parallel to the variable cost line and the difference
between the two cost lines is the total fixed cost. The advantage of this graph is
the area of contribution can be portrayed clearly that is located between the line
of sales revenue and line of total variable cost.
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iii. Profit-Volume-Graph

Profit-Volume-Graph is another alternative graphing CVP relationships

displayed in Figure 4.3. The horizontal axis represents the various level of
activity (volume sales) and the vertical axis represents the profit or losses for a
period. Using the same illustration for KWIH Trading, profits and losses are
plotted for each of level of activities and soon a profit line are drawn from here.
This graph highlights the impact of changes in level of activity on the profit and
losses.

Exhibit 4.3 Profit-Volume Graph

(RM)

Profit line
6000
Profit
4000
BEP P Profit
2000 AreaArea
Profit

0
2000 4000 6000 8000 10000 12000 Level of
activity
2000 (unit
sales)
Losses Loss
4000 Area

6000

The profit line intercepts the vertical axis at the amount equal to fixed cost
(RM6,000) at the zero activity level which also represent the maximum loss of a
business in a month. The BEP occurs when the profit line intercepts the
horizontal line at 6,000 units of sales.

Note that only profit line appears in the profit-volume graph. Neither costs nor
sales line to be appeared on the graph.

4.6 Margin Of Safety

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Break-even analysis also provides information to the management to evaluate a

business’s margin of safety as an indication of risk associated at a certain level
of sales.

Margin of safety (MOS) is the difference between the budgeted or actual

sales with the break-even sales for a period. It represents the amount of sales
that can be decline before a loss is incurred.

Business entity with a broader MOS indicate that the entity is with lower risk
and still in a stable position where the business still able to make profit though
sales decline. Entity having a narrow MOS shows that the business is in higher
risk and more vulnerable to the decline of sales, further declining in sales
volume may cause the entity reach break-even or even make a loss.

Determination of MOS by formulas:

 MOS (value or unit) = Sales – Break-even sales

 MOS (value) = Profit

c/s ratio

 MOS (unit) = Profit

Contribution Margin per unit

 MOS (%) = Sales – Break-even sales

Sales

4.7 Multi-Product CVP Analysis

A business with multi-products (sales-mix) is most likely dealing with products

with different selling price and different variable cost which gives different
contribution margin per unit and contribution margin ratio. The proportion of
sales mix must be predetermined in order to calculate the break-even point for
multi-products. The calculation method for the break-even point of sales mix is
based on the contribution margin approach method.

CVP analysis can be adapted for multi-product by applying Weighted Average

Contribution Margin (WACM) per unit and Weighted Contribution Sales
(WACS) ratio.

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Illustration 4.3
Shiny Co. sells three types of products, Choco, Vanilla and Milky. The
following data is the estimated sales activity for the next month:

Choco Vanilla Milky Total

Sales volume (unit) 1,500 1,000 500 3,000

Selling price per unit RM 4.00 RM5.00 RM8.00

Variable cost per unit RM1.60 RM2.70 RM4.80
Contribution per unit RM2.40 RM2.30 RM3.20
Contribution sales ratio 60% 46% 40%

RM RM RM RM
Total sales 6,000 5,000 4,000 15,000
Less: Total variable cost 2,400 2,700 2,400 7,500
Contribution 3,600 2,300 1,600 7,500
Less: Total fixed cost 3,000
Profit 4,500

a. Weighted Average Contribution Margin

WACM is the overall contribution of multi-products which based on the

contribution per unit of the individual products weight by their sales mix
proportion. The computation of WACM is based on the quantity proportion for
sales of Shiny Co. is 1,500 units of Choco, 1,000 unit of Vanilla and 500 unit of
Milky (3:2:1 sales mix ratio).

The WACM is computed as follows:

Product CM per unit Sales Mix WACM

Choco RM2.40 3/6 RM1.2
Vanilla RM2.30 2/6 RM0.7666
Milky RM3.20 1/6 RM0.5334
RM2.50

The same break-even formula (unit volume) for the single product is applied in
computing the break-even point for the multi-product above.

BE (unit) = Total Fixed Cost = RM3,000

WACM per unit RM2.5
= 1,200 units

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The break-even (unit volume) can be presented individually following the sales
mixed ratio of the multi-products:
3/6 x 1,200 unit = 600 unit
2/6 x 1,200 unit = 400 unit
1/6 x 1,200 unit = 200 unit

The Estimated Break-even Income Statement for a month.

Choco Vanilla Milky Total

RM RM RM RM
Total sales 2,400 2,000 1,600 6,000
Less: Total variable cost 960 1,080 960 3,000
Contribution 1,440 920 640 3,000
Less: Total fixed cost 3,000
Profit NIL

b. Weighted Average Contribution Sales ratio (WACS)

WACM is the overall contribution of multi-product which based on the

contribution sales of the individual products weight by their sales mix
proportion.

Product c/s ratio Sales Mix WACS

Choco 0.6 6/15 0.24
Vanilla 0.46 5/15 0.1533
Milky 0.4 4/15 0.1067
0.5000= 50%

The multi-product break-even sales value point can be determined as

follows:

BEP (RM) = Total Fixed Cost = RM3,000

WACS 50%
= RM6,000
Multi-Product Chart

A multi-product chart could be portrayed through plotting the individual

products each with their individual contribution sales ratio and later the overall
profit line can be drawn. The same profit-volume chart for a single product will
be used for multi-product sales, except the level of activity being represented by
sales value (RM).

The product ranking is an important step in schedule the accumulated profit

table.
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It begins with choosing the product with highest contribution-sales (CS) ratio,
that is product Choco (60%), follows by Vanilla (46%) and Milky (40%).

The horizontal axis of the multi-product graph will be representing by the

accumulative sales value and the vertical axis is representing by the
accumulative profit or loss.

Product Rank Accumulative Accumulative Less Fixed = Accumulative

Sales Contribution Cost Profit
RM RM RM RM
Choco 1 6,000 3,600 - 3,000 = 300
Vanilla 2 11,000 5,900 - 3,000 = 2,900
Milky 3 15,000 7,500 - 3,000 = 4,500

An individual profit line of individual product will be drawn. Later the overall
profit line will be plotted by joining the point of maximum losses (RM3,000)
and the accumulative profit (RM4,500). The overall profit line represents profit
of the sales-mix and contribution/sales ratio that intersects the sales value axis
and gives the BEP that approximately at RM6,000.

Exhibit 4.4 Multi-Product Profit Chart

Profit (RM)

5000

4000

3000

2000

1000

0
5000 10000 15000 Sales value
-1000 BEP at RM6,000 (RM)

-2000

-3000
Indicator:
Loss Overall Profit Line

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Chapter Summary

Formula:

 Contribution margin per unit = selling price per unit – variable cost per
unit
 CS Ratio = Contribution Margin per unit/ selling price per unit

 Break-even sales (units) = Fixed costs ÷ CM per unit

 Break-even sales (value) = Fixed costs ÷ CS ratio

 Profit target (units) = (fixed costs + profit target) ÷ CM per unit

 Margin of safety (percentage) = (Sales – break-even sales) x 100

break-even sales
 Margin of safety (units) = Sales (units) - Break-even sales (units)
 Margin of safety (value) = Sales (value) - Break-even sales (value)

 The CVP analysis is concerned with impact on profit due to changes in

volume activity and costs.
 The CVP analysis only can be used in certain relevant range of activity
and in short run.
 The CVP analysis emphasis with cost behavior and contribution margin is
the important key in the discussion.
 The usage of CVP analysis withheld within its limitations and
assumptions.
 The CVP analysis can be made through the break even analysis.
 The equation approach, contribution margin approach and graphical
approach are the methods used for the break even analysis.

TUTORIAL QUESTIONS

QUESTION 1 (MAR2015/MAF201)

Sweet Bakery Enterprise specializes in making a desert named pavlova for

delivery in Perlis. The target market is mainly matriculation and university
students’ dormitories and colleges.

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Followings are the information available for the year 2014:

1. Selling price for each unit is RM10.00.

2. Ingredients such as eggs, sugar, flour, vinegar and vanilla essence

amounted to RM2.50 for one unit of pavlova. Sweet Bakery Enterprise
uses fresh cream and fruits as toppings and the cost are RM1.00 for one
unit of pavlova.
3. Sweet Bakery Enterprise hired Miss Nadia and she is paid RM5.00 per
hour. Miss Nadia can produce 5 units of pavlova in one hour.

4. Other cost incurred per annum are:

Rent and rates RM18,000
Insurance RM12,000
Depreciation of equipment RM9,900

5. Packaging expenses amounted to RM0.50 per unit. The company also

incurred RM1.50 delivery cost for each unit of pavlova.

The current average monthly sales are 2,000 units of pavlova.

Required:
(Each question is to be treated independently)

a. Classify the cost into variable cost per unit and total fixed cost for Sweet
Bakery Enterprise.
b. Determine:
i. The company’s break-even point in units and value for the year.
ii. The sales units of pavlova that have to be sold if the owners
decided to have a margin of safety of 15,000 unit per year.
iii. The number of units of pavlova the company needs to sell in
order to achieve a target net profit of RM65,100 per year.

c. For the year 2015, a special equipment would have to be bought at

RM500 and it is estimated that the machine would last for 5 years with
no resale value. By having the new equipment the company forecasted
that the profit will increase by 10%.
Required: Estimate the new selling price of pavlova for the year 2015.

d. If the owner of Sweet Bakery Enterprise is planning to change the

delivery cost of RM1.50 per unit to RM36,000 per year.
Advice the owner whether the changes can be implemented. (Evaluate
your answer using break-even point in units)

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e. List FOUR (4) assumptions of Cost Volume Profit analysis.

QUESTION 2 (SEP2015/MAF201)

Orange Food Sdn Bhd is a company producing and selling biscuit called
‘Pepper Orange’. Market research shows that the company could sell at least
80,000 packets per month at a selling price of RM3.00 per packet. For each
packet sold, the manager is confident of getting 10% contribution margin.
The following fixed costs are expected to be incurred during September 2015:
RM
Rent 5,000
Wages and salaries 8,000
Miscellaneous expenses 1,500

For production purposes, the company needs to use the following assets. The
depreciation rates for the assets are as follows:

Cost Depreciation rate

Motor vehicle RM20,000 15% per annum
Machinery RM30,000 20% per annum

Required:
(Notes: i. All calculations are to be made to two decimal places.
ii. Each question is to be treated independently.)

a. Identify in details the total fixed costs for product ‘Pepper Orange’.

b. Determine:
i. Whether the company can achieve the break-even point at the
current sales level.
ii. The new selling price if the company plans to break-even at the
sales level of 40,000 packets per month.

c. The company believes that by spending an extra of RM5,000 per month

on marketing and promotion, it will increase the sales by 20,000 packets
per month. Advice the company should implement the plan based on
profitability.

d. The company plans to introduce a new product ‘Black-seed Orange’.

Black-seed Orange can be sold at RM2.00 per packet with the
contribution margin of 20% per packet. The introduction of the new
product line will increase the monthly total fixed costs of the company
by RM2,000 monthly.

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You are given the following proposal:

Proposal 1
Proposal sales mix in unit
Pepper Orange 60%
Black-seed Orange 40%
Proposal 2
Proposal sales mix in unit
Pepper Orange 40%
Black-seed Orange 60%
Advice the company on which proposal should be choosen. (Support
your answer using break-even point in unit).

e. Give FOUR (4) limitations of Cost Volume Profit analysis.

QUESTION 3 (MAR2016/MAF201)

Bestari Maju Sdn Bhd is a company producing and selling Bestari Juice.
Financial data concerning the company are as follows:

Selling price per bottle RM90.00

Sales volume 5,000 bottles

Variable cost per bottle: RM

Direct material 25.00
Direct labour 8.00
Manufacturing overhead 7.00

Fixed costs:
Annual rental RM36,000
Annual salaries RM60,000
Motor vehicle RM80,000 is depreciated at 10% per
annum
Machinery RM50,000 is depreciated at 15% per
annum
Miscellaneous expenses RM1,500 per month

The owner is now considering a few alternatives for future expansion and
comes to see you for an advice.

Required:
(Each question is to be treated independently)

a. At the current operating level, identify the following:

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i. Break-even point in bottles of Bestari Maju Sdn Bhd.

ii. The number of bottles of Bestari Juice that need to be sold by the
company in order to obtain a net profit of 40% of sales.

b. The company plans to improve the quality of Bestari Juice next year, but
the improvement will increase the variable cost by RM15.00 per bottle.
The management believes that the improvement to the juice, along with
increased advertising costing RM100,000 will boost sales by 25%.

Advise the company on selling price that needs to be charged for the
firm to earn a net income of RM250,000.

c. Besides the production of Bestari Juice, the company plans to produce

and sell a new product known as Maju Lazat Juice. The owner has
estimated that the variable cost would amount to RM50.00 per bottle and
Maju Lazar Juice can be sold at RM85.00 per bottle.

In order to produce Maju Lazat Juice, Bestari Maju Sdn Bhd has to buy
a new machine costing RM30,000 which would last for 5 years.
Miscellaneous expenses for the production are expected to increase by
RM15,375 per annum. Other costs are estimated to remain constant and
to be shared by both products. The sales of Maju Lazat Juice are
expected to be 3,0000 bottles per annum.

Advise whether the company should proceed with the plan with regards
to the following matters:
i. Break-even point (in units and value) for each product
ii. Net profit the proposal level

d. State FOUR (4) assumptions of cost volume profit analysis

QUESTION 4 (OCT 2016/MAF201)

Kiddie Toy Sdn Bhd produces a type of toy sold for RM110.00 per unit. The
normal yearly production and sales for the toys are 1,600 units, although the
company has the capacity to produce up to 2,000 units.

The following data consist of costs incurred during the year ended 2015:

RM
Materials (100% variable) 40,000
Labour (60% variable) 40,000
Variable selling expenses 12,800
Fixed selling expenses 25,000
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Fixed administrative expenses 20,000

The management accountant of the company is proposing the following

alternatives to increase sales for the year 2016 and to reduce the idle capacity:

1. Reducing the selling price to RM100 per unit which would lead to an
estimated increase in sales volume by 20%.
2. An increase in sales would result in an increase of variable labour cost per
unit by 10%.
3. Fixed selling expenses is expected to increase to RM27,500 due to an
aggressive advertising campaign planned to boost sales.

Required:

a. Identify the costs in year 2015 into:

i. Total variable costs per unit
ii. Total fixed costs

b. Evaluate the following in year 2015:

i. Break-even point in units and value
ii. Margin of safety in value
iii. The expected sales value if the company targets for a profit of
RM60,000

c. Advice the management of the company if it should implement the proposed

alternative for year 2016.
(Show profit comparison)

d. Define the following terms:

i. Contribution margin ratio
ii. Margin of safety

QUESTION 5 (MAR 2017/MAF201)

Super Foods Sdn Bhd produces a single product, Golden Berries which
currently sells for RM299.00 per unit. Material and labour costs are RM38 and
RM27 per unit respectively.

Annually the company incurred the following costs:

RM
Production Overhead 600,000
Selling & Distribution 400,000
Administration 280,000
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Storage 260,000

The production overhead and selling & distribution are a mixed cost where 30%
and 40% of the cost vary with the number of unit produced. The administration
and storage costs are fixed in nature. The budgeted annual sales revenue is
RM2,990,000.

Required:

a. Calculate variable cost per unit and total fixed cost.

b. Explain the figures obtained from the following analysis:

i. Break-even point in both units and value
ii. Margin of safety in both units and value.

c. Super Foods Sdn Bhd is venturing into exporting its product. Due to
demand, the company needs to introduce another two products which are
similar to its current product but are more acceptable globally. The
information relating to the three products is as follows:

Golden Berries Goji Berries Acai Berries

Selling price (RM) 299 249 279
Variable cost (RM) 99 69 89
Sales Mix (%) 36% 30% 34%

The new total fixed overhead cost for the company is expected to increase to
RM1.8 million annually.

Predict the following:

i. The total break-even point of multi products in unit and value

ii. The individual break-even point in unit
(all calculations are to be made to the nearest ringgit)

d. State FOUR (4) limitations of cost volume profit analysis.

QUESTION 6

Kelsi Sdn Bhd has been selling chocolate-flavoured yogurt in Kuching for a few
years. The management of the company wants to expend the business to Kota
Samarahan. The selling price and variable cost per carton is RM3.50 and
RM1.50 respectively. The projected fixed cost is RM5,000 per month. The
management estimates that 2,850 cartons will be sold in a month.

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As the management accountant of Kelsi Sdn Bhd, you have been asked to
analyse the proposal:

Required:

a. Identify the following:

i. Break-even point in carton and value (RM)
ii. Margin of safety in carton and value (RM)

b. Predict the company’s profit if:

i. 3,500 cartons are sold
ii. 4,150 cartons are sold, with a discount of RM0.50 per carton given for
every carton sold in excess of break-even point.

c. Kelsi Sdn Bhd conducted a survey relating to flavour demanded by

customers in Kota Samarahan. Accordingly, to the survey, the customers
also prefer banana and strawberry-flavour yogurt. Since the demand of
these flavours are very high, the management plans to add these flavors in
their production line for Kota Samarahan.

The introduction of new flavours will increase the fixed costs to RM5,800
while maintaining the estimated sales units at 2,850 cartons per month.

The following are the proposal for the additional flavours:

Chocolate Banana Yogurt Strawberry

Yogurt Yogurt
Selling Price RM3.50 RM4.50 RM4.00
Variable Costs RM1.50 RM1.90 RM1.70
Sales Mix 30% 45% 25%

Advise the company whether or not to proceed with the new flavours in
Kota Samarahan. (Support your answer using break-even point and net
profit).

d. List FOUR (4) uses of cost volume profit analysis.

QUESTION 7 (JUN 2018/MAF201)

Smart Technology Sdn Bhd has been manufacturing and selling electronic
calculator since 2010. The management of the company is planning to improve
its financial position in order to maintain the growth rate of the company. The
data given below are related to the current year.

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Selling price per unit RM60

Annual sale volume (units) 132,000

Variable costs per unit: RM

Direct material 20
Direct labour 10
Manufacturing overhead 9
Selling expenses 3

Annual fixed costs: RM

Manufacturing overhead 404,000
Selling and administrative 532,000

Required:
(Each question is to be treated independently)

a. At the current operating level, identify the following:

i. Break-even point (in units)
ii. Margin of safety (in units)

b. In order to boost sales, the marketing manager suggested a more aggressive

promotional campaign to be carried out. This campaign would cost an
additional Rm16,000 per annum.
Determine:
i. The new break-even point (in units)
ii. The net profit
iii. The margin of safety (in RM)

c. The management team is in the process of preparing budgets for the coming
year. From the feedback that they received, it is expected that the direct
labour cost will increase by 5%, while variable selling cost and direct
material cost will decrease by 4% and 2% respectively. Assuming the total
fixed costs remain at RM936,000, advice the company on the number of
electronic calculator (in units) it should sell next year in order to break-
even.

d. Referring to the situation in part (c) above, recommend the number of

electronic calculator (in units) the company must sell next year in order to
maintain this year’s profit.

e. State FOUR (4) assumptions of cost volume profit analysis.

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QUESTION 8 (DEC2018/MAF201)

Indah Seri Bhd produces ceramic-based product. The product is known as

ceramic pot which is sold at RM25 per unit. Below is the information regarding
the costs incurred in producing 45,000 units of ceramic pot in the current year.

RM
Direct material 270,000
Direct labour 247,500
Direct expenses 112,500
Production overhead 150,000
Administrative overhead 85,000
Selling overhead 90,000

Additional information:

1. All direct costs change in direct proportion with the level of production.
2. Variable production overhead is absorbed based on 20% of direct labour cost.
3. Commission is part of selling overhead and it is paid at RM1.20 for every
unit sold.
4. All administrative overhead is a fixed cost.

Required:
a. Classify the current costs into:
i. total variable cost per unit.
ii. total fixed costs for the year.

b. Determine for the current year:

i. Break-even point in unit
ii. Margin of safety in value
iii. Number of units to be sold if the company plans to achieve profit
of RM210,000

c. In addition to the current production, the company plans to introduce

two new products; ceramic pan and ceramic steamer in the following
year in order to improve its performance. The projected data collected by
the cost accountant for the additional two new products for the following
year are as follows:

Ceramic Pan (RM) Ceramic Steamer

(RM)
Selling price 30.00 50.00
Variable cost 18.00 42.00

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The company plans to sell the products at the following sales mix:

Products Units to be sold

Ceramic Pot 40,000
Ceramic Pan 20,000
Ceramic Steamer 20,000

The introduction of the new products requires the company to revise its
total fixed costs by taking into consideration the following:

i. Fixed production overhead will increase by 15%

ii. Extra promotion cost of RM30,000

Required:

Advise whether the company should proceed with the plan to improve
its performance with reference to break-even point.

d. Define the following:

i. Contribution margin
ii. Margin of safety

QUESTION 9 (JUN 2019/MAF201)

Rara Curtain Sdn Bhd is currently producing and selling one type curtain known
as Roller Blinds. The following data relates to the current sales and production
of 40,000 units of Roller Blinds:
RM RM
Sales 1,320,000
Production cost:
Direct material 220,000
Direct labour 208,000
Variable production overhead 88,000
Fixed production overhead 74,400
590,400
Non-production cost:
Variable selling and distribution 104,000
Fixed selling and distribution 39,600
Fixed administration 8,760
152,360
Net Profit 577,240

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Required:
(Each question is to be treated independently)

a. Classify the cost into:

i. Total variable cost per unit
ii. Total fixed cost for the year
b. Using the above information, calculate the following:

i. The breakeven points (in unit and RM)

ii. The margin of safety (in unit and RM)
iii. Units to be sold by the company if the desired net profit is to be
10% higher from the current net profit.

c. The company estimated that the direct labour cost per unit will increase by
10% and fixed selling and distribution expenses will increase to RM40,000.

Required:

Predict the selling price needs to be set for Roller Blinds if the company
wish to maintain the current net profit and current sales volume.

d. The manager of the company is proposing to produce and sell two (2) new
types of blinds, Bamboo Blinds and Wooden Blinds in addition to the
current production in order to improve its performance. The projected
information related to the new proposed products are as follows:

Product Sales unit Selling price Variable cost per unit

Bamboo Blinds 25,600 RM25.00 RM13.00
Wooden Blinds 14,400 RM34.00 RM19.00

The total fixed cost for the company will increase by RM120,000 if the two
products are being produced and sold.

Required:

Advise whether the company should proceed with the proposal to produce
and sell the three types of blinds, or maintain with the current operation.
Your advice should be based on the net profit comparison.

e. Outline FOUR (4) advantages of cost volume profit analysis for the
company.

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QUESTION 10 (OCT2008/MAF310)

Fruitti Sdn Bhd bottles and sells fruit juices. The bottled drinks are made from
fruit juice concentrates which are purchased from an overseas supplier in cases
containing 6 bottles. Fruitti sells the fruit juices in cases of 6 bottles each.

The company sells four different flavors of bottled fruit juices. The costs and
price for each case is as follows:

Other
Purchase cost Selling price Sales mix
Flavor variable cost
RM RM %
RM
Strawberry 9.00 3.00 24.00 40%
Peach 9.00 3.00 24.00 25%
Kiwi 13.60 4.00 32.00 20%
Grape 18.00 3.00 35.00 15%

Fixed cost per annum:

Selling and Administrative costs RM27,400
Manufacturing costs RM26,000

Required:

a. Calculate Frutti’s break-even sales unit and revenue based on the current
sales mix. (Round your computations to the nearest RM.)

b. Suppose that the expected total sales of fruit juices for the coming year are
4,000 cases. Determine the expected profit based on:
i. the current sales mix.
ii. the new sales mix as suggested by a sales staff, namely, Strawberry
20%; Peach 10%; Kiwi 30% and Grape 40%.

c. List FOUR (4) limitations of CVP analysis.

QUESTION 11

Sound Tech Berhad is a company specializing in the production of

microphones. An extract of the Statement of Profit or Loss for the month of
February and March 2016 was summarized as follows:

February March
Units produced and sold 15,000 17,000
RM RM

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Sales 210,000 238,000

Less:
Direct materials 75,000 85,000
Direct labour 30,000 34,000
Variable factory overhead 45,000 51,000
Selling and administrative overhead 35,000 39,000
Fixed factory overhead 10,000 10,000
Profit 15,000 19,000

Required:

a. Calculated the variable and fixed cost of the above costs using high low
method.
b. Calculate for the month of February:
i. The break-even point in units.
ii. The contribution-sales ratio (C/S Ratio)
c. Calculate for the month of March:
i. The Margin of Safety in units.
ii. The Margin of Safety as a percentage of sales.
d. The following changes, which are expected in April 2016, would have
an impact on the operations of Sound Tech Berhad:

 Targeted Production and Sales would increase to 25,000 units.

 Profit is projected to reach RM27,500.
 Direct Material costs would increase by 10%.
 Direct Wages would increase by 4%.
 Variable overheads would increase by 2%.
 Fixed costs would increase to RM18,000.
Based on the above expected changes in April 2016, calculate:
i. The new budgeted selling price per unit.
ii. The new break-even point in units and value.

e. Define the following:

i. Contribution sales ratio (C/S ratio)
ii. Break-even point
iii. Margin of safety

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QUESTION 12 (DEC19/MAF201)

Harmoni Bhd produces a single product known as Red Guava Cordial. The
following data relate to the production and sales of the product for the current year:

Annual sales 32,000 bottles

Selling price per bottle RM22.00
Direct material cost per bottle RM2.40
Direct labour cost per bottle RM2.15
Annual total production overhead RM300,000

Additional information:

1. Variable production overhead is 40% of the annual total production

overhead.
2. Variable selling overhead per bottle is RM1.70.
3. Fixed selling and administrative overhead are RM30,000 per annum.

Required:

(Each question is to be treated independently)

a. Identify the following for the current year:

i. Contribution margin per bottle
ii. The break-even point of the product in bottle and value

b. Determine the following for the current year:

i. The margin of safety in bottles and value
ii. The profit that will be earned at the current level of sales
iii. The number of bottles to be sold if the company wishes to earn a
profit of RM240,000

c. The company plans to increase the sales to 38,000 bottles for the
following year. To achieve the sales target, the company is expected to
incur additional sales commission of RM0.70 per bottle and packaging
cost of RM1.00 per bottle. In addition, the company will have to pay
additional promotional cost of RM15,000 per annum.

Required:
Predict the new profit for the company.

d. Recently, there is a surge in demand for cordial. In order to stay

competitive, the company plans to introduce a new line of cordial besides
Red Guava, namely Green Guava. The variable cost per bottle for Green
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Guava cordial is expected to be RM7.50 and the selling price per bottle is
RM15.00.

To cater for the increase in production, the company has to acquire a new
machine with a greater production capacity. It will cost RM80,000 with a
useful life of 10 years. Hence, the old machine is no longer required and
needs to be disposed. The depreciation of the old machine is amounted
RM10,000 per annum which is included in the current annual total
production overhead.

In addition, the company will also incur advertising and promotional costs
amounting RM22,000 per annum. The sales for Green Guava are expected
to be 18,000 bottles.

Required:
Advise the company whether they should proceed with the plan based on
the company’s break-even point in bottles.

e. State FOUR (4) assumptions of Cost-Volume-Profit (CVP) analysis.

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