Assignment No: 1

Topic: CVP analysis

Student Name: Afaq Ahmed Student ID: 10495

CVP application – eliminate product from operations? Body Sculpture, Inc., makes three models of high=performance weight-training
benches. Current operating data are summarized here:

Mega Muscle Power Gym Perforce

Selling price per 280 400 580

unit

Contribution 84 154 116

margin per unit

Monthly sales 6,000 4,000 2,000

volume-units

Fixed expenses per Total of 1,280,000

month
Solution:

a. Calculate the contribution margin ratio of each product.

Mega muscle: 84 /280 = 0.3

Power Gym: 154/400 = 0.385

Perforce: 116/580 = 0.2

b. Calculate the firm’s overall contribution margin ratio.

Total contribution margin per unit: 84+154+116 = 354

Total sale price: 280+400+580 =1260

Over all firms Contribution margin ratio= 354/1260 = 0.280

c. Calculate the firm’s monthly break-even point in sales dollars.

BEP = 1280000/354 = 3615.8 units

BEP (value) = 3615x 1260 = 4554900$

d. Calculate the firm’s monthly operating income.

Mega muscle = 84 x6000 = 504000

Power Gym = 154 x 4000 = 616000

Perforce = 116 x2000 = 232000

Total Contribution margin = 504000 +616000 +232000 = 1352000

Monthly operating income = 1352000-1280000 = 72000$

e. Management is considering the elimination of the Perforce model due to its low sales volume and low contribution margin ratio. As
a result, total fixed expenses can be reduced to $1,080,000 per month. Assuming that this change would not affect the other models,
would you recommend the elimination of the Perforce model? Explain your answer.

Fixed cost = 1080000

Contribution margin of Perforce = (232000)

Total contribution margin = 504000+ 616000 =1120000

Now monthly operating income = 1120000- 1080000 = 40000$

I will not recommend the elimination of perforce model because it will decrease monthly income of firm .
f. Assume the same facts as in part e. Assume also that the sales volume for the Power Gym model will increase by 1,000 units per
month if the Perforce model is eliminated. Would you recommend eliminating the Perforce model?

In this case sales volume of Power Gym is increasing by 1000units = 1000+4000 =5000 units/month

Contribution margin = 5000 x 154 = 770000

Total Contribution margin of Power gym and Mega plus = 770000+504000 =1274000

Fixed cost = 1080000

Monthly operating income = 12740000- 1080000 =194000$

I will prefer to eliminate PERFORCE model as the monthly operating income of the firm is increasing by eliminating it.