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Tutorial 8
Tutorial 8
Tutorial 8
1. In the month of October, a company sold 2,700 units of a product at $30 each. During the month,
fixed costs were $26,000 and variable costs were 60% of sales.
(a) Determine the contribution margin (i) in dollars, (ii) per unit and (iii) as a ratio.
(b) Calculate the breakeven point (i) in dollars and (ii) in units.
(c) Define the term “margin of safety.” Calculate the margin of safety (i) in dollars and (ii) as a ratio.
$12
Contribution margin (ratio) = = 40%
$30
$26,000
(b) Breakeven sales (in dollars) = = $65,000
0.40
$26,000
Breakeven sales (in units) = = 2,167 units (rounded).
$12
(c) Margin of safety is the difference between actual or expected sales and sales at the breakeven
point.
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Accounting and Financial Management
2. Tak Mahal Company bottles and distributes Buahan, a fruit drink. The beverage is sold for RM1 per
500ml bottle to retailers, who charge their customers RM1.40 per bottle. For the year 2019,
management estimates the following revenues and costs.
RM640,000
(a) Contribution margin ratio = = 32%
RM2,000,000
(b) Unit contribution margin = Selling price × CMR = RM1 × 0.32 = RM0.32
RM2,000,000
Alternatively: Budget unit sales = = 2,000,000
RM1/unit
RM640,000
CM per unit = = RM0.32
2,000,000
FC RM448,000
(i) BEQ = = = 1,400,000 units
CMu RM0.32
FC RM448,000
(i) BE sales revenue = = = RM1,400,000 (or 1,400,000 units × RM1)
CMR 0.32
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Accounting and Financial Management
3. Island Novelties Pte Ltd of Singapore makes two products. Hawaiian Fantasy and Tahitian Joy.
Present revenue, cost and sales data for the two products follow:
Hawaiian Tahitian
Fantasy Joy
Selling price per unit $15 $100
Variable expenses per unit $9 $20
Number of units sold annually 20,000 5,000
(a) What is the overall contribution margin ratio (CMR) for the company? Show all your
calculations.
(b) Complete the table above by filling in the percent columns.
(c) Calculate
(i) the overall break-even revenue for the company, and
(ii) the break-even revenue for each product.
(d) Calculate the margin of safety for the company as a whole in both revenue amount and percent.
(e) The company has developed a new product to be called Samoan Delight. Assume that the
company could sell 10,000 units at $45 each. The variable expenses would be $36 each. The
company’s fixed expenses would not change.
(i) Prepare a contribution format income statement, including sales of the Samoan Delight
(sales of the other two products would not change). Show both dollar and percent columns
for each product and for the company as a whole, as in the original income statement
above.
(ii) Calculate the company’s new overall break-even point in dollar sales.
(iii) Calculate the company’s break-even point in dollar sales for each of the new products.
(iv) Calculate the new margin of safety in both dollars and percent.
(f) The president of the company examines your figures and says, “There’s something strange here.
Our fixed expenses haven’t changed and you show greater total contribution margin if we add
the new product, but you also show our break-even point going up. With greater contribution
margin, the break-even point should go down, not up. You’ve made a mistake somewhere.”
Explain to the president what has happened.
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Accounting and Financial Management
$520,000
(a) Overall CMR = = 65%
$800,000
(b)
Hawaiian Fantasy Tahitian Joy Total
Percent Percent Percent
$ of sales $ of sales $ of sales
Sales $300,000 100% $500,000 100% $800,000 100%
Variable expenses (180,000) 60% (100,000) 20% (280,000) 35%
Contribution margin $120,000 40% $400,000 80% $520,000 65%
Fixed expenses (475,800)
Operating income $44,200
𝐹𝐶 475,800
(c) (i) Overall BE revenue = = = $732,000
𝐶𝑀𝑅 0.65
(ii) CVP analysis assumes that the sales mix remains unchanged. Therefore, the breakeven revenue
for each product is:
300,000
Breakeven sales for Hawaiian Fantasy = × $732,000 = $274,500
800,000
500,000
Breakeven sales for Tahitian Joy = × $732,000 = $457,500
800,000
(d) MOS in dollars = Actual sales – Breakeven sales = $800,000 – $732,000 = $68,000
$68,00
= = 8.5%
800,000
(e) (i)
Hawaiian Fantasy Tahitian Joy Samoan Delight Total
Percent Percent Percent Percent
$ $ $ $
of sales of sales of sales of sales
Sales $300,000 100% $500,000 100% $450,000 100% $1,250,000 100%
Variable expenses 180,000 60% 100,000 20% 360,000 80% $640,000 51%
Contribution margin $120,000 40% $400,000 80% $90,000 20% $610,000 49%
Fixed expenses 475,800
Operating income $134,200
475,800
(ii) New overall BEP = = $971,021 (approximate)
0.49
(iii) As CVP analysis assumes sales mix is unchanged, the new breakeven sales for each product is:
300,000
Breakeven sales for Hawaiian Fantasy = × $971,021 = $233,045
1,250,000
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Accounting and Financial Management
500,000
Breakeven sales for Tahitian Joy = × $971,021 = $388,408
1,250,000
450,000
Breakeven sales for Samoan Delight = × $971,021 = $349,568
1,250,000
(iv) MOS in dollars = Actual sales – Breakeven sales = $1,250,000 – $971,021 = $278,979
$1,250,000 − $971,021
MOS percentage =
1,250,000
$278,979
=
1,250,000
= 22.3% (rounded)
(f) The breakeven point depends on two variables – total fixed costs and the contribution margin ratio.
Total contribution margin alone is not used to determine the breakeven point.
Although total fixed costs is unchanged, the introduction of the new product causes the overall
contribution margin ratio to decrease from 65% to 49%. This is due to the much lower contribution
margin ratio of the new product, which pulls down the firm’s weighted average contribution margin.
This lower average contribution margin ratio results in the firm requiring a higher amount of sales
to break even.
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Accounting and Financial Management
4. Tong Garden Supplies Company installs lawn sod in home yards. The company’s most recent
monthly contribution format income statement follows:
(a) Operating leverage is the extent to which fixed assets and associated fixed costs are utilized in
business. Higher fixed costs as a proportion of total cost increases business risk as it requires more
sales to breakeven. The operating leverage of a firm can be measured by the ratio Degree of
Operating Leverage. The DOL measures the effect of fixed costs on operating profit, i.e., the
percentage change in operating profit as a result of a percentage change in sales.
Tong has a relatively high DOL. At the current level of sales, a 1% increase/decrease in sales will result
in 4.8% increase/decrease in operating income. This shows that Tong’s profit is relatively volatile, which
indicates a relatively high business risk.
Amount
Sales RM84,000
Variable expenses 33,600
Contribution margin 50,400
Fixed expenses 38,000
Net operating income RM12,400
As predicted by the DOL, when sales increase by 5%, operating income increases by 24%, i.e., from
RM10,000 to RM12,400.
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