May-2011, 2(b) - CVP Analysis

Lisa Company is the exclusive distributor for an automative product. The product sells for Tk. 40 per unit and has a CM
ratio 30%. The company's fixed expenses are Tk. 180,000 per year.
Required:
i) What is the variable expenses per unit?
ii) Using the equation method:
1) What is the break-even point in units and sales taka?
2) What sales level in units and in sales taka is required to earn an annual profit of Tk. 60,000?
3) Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by Tk. 4 per unit.
What is the Company's new break-even point in units and sales taka?
iii) Repeat (ii) using the unit contribution method.

Solution

Answer (i)

We Know,

CM Ratio = Contribution / Sales

=> CM Ratio = (Selling Price - VC per Unit) / Selling Price
=> 0.30 = (40 - VC) / 40
=> 12 = 40 - VC
=> VC = 40 - 12
=> VC= 28 per Unit

Answer (ii) : Equation Method

1) BEP in Units and Taka

------------------------------

We have,
p = 40, v = 28 and FC = 180,000
40x = 28x + 180,000
=> 40x − 28x = 180,000
=> 12x = 180,000
So, Break-even in Units = x = 15,000 units
Break-even Point in Sales Taka = 40 × 15,000 = 600,000 Taka.

2) Targeted Sales in Units and Taka

-------------------------------------------

If Targeted Profit, P= Tk. 60,000,

We have,
40x = 28x + 180,000 + 60,000
=> 40x − 28x = 240,000
=> 12x = 240,000
So, Break-even in Units = x = 20,000 units
Break-even Point in Sales Taka = 40 × 20,000 = 800,000 Taka.

3) BEP in Units and Taka (If VC changes)

------------------------------------------------

If VC reduces by Tk. 4,

We have,
p = 40, v = 28-4 = 24 and FC = 180,000
40x = 24x + 180,000
=> 40x − 24x = 180,000
=> 16x = 180,000
So, Break-even in Units = x = 11,250 units
Break-even Point in Sales Taka = 40 × 11,250 = 450,000 Taka.
Answer (iii) : Unit Contribution Method

1) BEP in Units and Taka

-----------------------------

BEP in Units
= Fixed Costs / Contribution Margin par Unit
= Fixed Costs / (Selling Price - VC par Unit)
= 180,000/ (40 - 28)
= 180,000/12
= 15,000 Units.

BEP in Taka
= Fixed Costs / CM Ratio
= 180,000/ 0.30
= 600,000 Taka.

2) Targeted Sales in Units and Taka

------------------------------------------

Targeted Sales in Units

= (Fixed Costs + Targeted Profit)/ Contribution Margin par Unit
= (Fixed Costs + Targeted Profit)/ (Selling Price - VC par Unit)
= (180,000+60,000)/ (40 - 28)
= 240,000/12
= 20,000 Units.

Targeted Sales in Taka

= (Fixed Costs + Targeted Profit)/ CM Ratio
= (180,000+60,000)/ 0.30
= 240,000/ 0.30
= 800,000 Taka.

3) BEP in Units and Taka (If VC changes)

------------------------------------------------

BEP in Units
= Fixed Costs / Contribution Margin par Unit
= Fixed Costs / (Selling Price - VC par Unit)
= 180,000/ [(40 - (28 - 4)]
= 180,000/16
= 11,250 Units.

New CM Ratio
= (Selling Price - VC per Unit) / Selling Price
= (40 - 24) / 40 = 0.40

BEP in Taka
= Fixed Costs / CM Ratio
= 180,000/ 0.40
= 450,000 Taka.
 May-2011, 3(b) - Cost of Goods Manufactured Statement

Note:
 Purchase of Raw Materials = Purchase + Freight In - Purchase Return - Purchase Discount = =400000+12000-
3200-20000 = 388800
 Manufacturing Overhead = Factory Depreciation + Factory Insurance + Other Factory Expenses =
160000+50000+16000 = 226000
Dec-2012, 2(b) : Costs of Goods Sold Statement
 Dec-2012, 6(c) : Working Capital Financing

Note: Here, It is assumed that Interest is paid in advance.

2013 June - 2 (b)
Income Statement
Total amount Unit cost
Sales revenue 2,520,000
Less: Cost of goods sold
Direct material, opening inventory 200,000
Purchase 675,000
Direct material, closing inventory (160,000)
Direct material consumed 715,000
Freight in 1,000
Direct manufacturing labour cost 240,000
Prime cost 956,000
Factory overhead 191,200
Total manufacturing cost 1,147,200 458.88
WIP, opening inventory -
WIP, closing inventory -
Cost of goods manufactured 1,147,200 458.88
FG, opening inventory 210,000
Cost of goods available for sale 1,357,200
FG, closing inventory (321,216)
Cost of goods sold (1,035,984) 493.33

Gross profit 1,484,016 706.67

Less: Administrative expenses (6,000)
Selling expenses (12,000)
Net profit 1,466,016 698.10

2013 June - 3 (b)

(i) Variable expense per unit = 40 - (40 × 30%) = 28

(ii) BEP :
In units = 180,000 / (40 - 28) = 15,000 units
In sales = 180,000 / 30% = Tk. 600,000

(iii) Required sales level :

In units = (180,000 + 60,000) / (40 - 28) = 20,000 units
In sales = (180,000 + 60,000) / 30% = Tk. 800,000

(iv) BEP :
In units = 180,000 / (40 - 24) = 11,250 units
New CM ratio = 16 / 40 = 40%
In sales = 180,000 / 40% = Tk. 450,000

2013 June - 5 (b)

Cash budget
Jan Feb Mar Total
Cash receipts:
From sales 16,000 24,000 27,000 67,000
From trade receivables 30,000 18,000 22,000 70,000
46,000 42,000 49,000 137,000

Cash payments:
Trade creditors 14,000 33,000 36,000 83,000
Accrued sales commission 3,500 - - 3,500
Fixed cost 3,000 3,000 3,000 9,000
20,500 36,000 39,000 95,500

Receipt over payments 25,500 6,000 10,000 41,500

Opening cash balance 7,500 33,000 39,000 7,500
Closing cash balance 33,000 39,000 49,000 49,000
2013 June - 8 (b)

Annual Profit Cash flow Cumulative Discount Present

Year CFBT Tax @ 35%
Depreciation before tax after tax Cash flow factor Value
0 (500,000) - - - (500,000) (500,000) 1.000 (500,000)
1 100,000 90,000 10,000 3,500 96,500 (403,500) 0.870 83,955
2 150,000 90,000 60,000 21,000 129,000 (274,500) 0.756 97,524
3 200,000 90,000 110,000 38,500 161,500 (113,000) 0.658 106,267
4 225,000 90,000 135,000 47,250 177,750 64,750 0.572 101,673
5 350,000 90,000 260,000 91,000 259,000 323,750 0.497 128,723
Net present value 18,142

Payback period = 3 years + (113,000 / 177,750) years = 3 years 7 months 19 days

NPV = BDT 18,142

96,500 + 129,000 + 161,500 + 177,750 + 259,000

Profitability index = = 1.04
500,000

Comment: The invested money is expected to be returned within 3 years 7 months 19 days and the project has a positive
NPV for the entire life which results in PI more than 1. So, the project can be taken up.
 2013 December – 2(c)

Direct material, opening inventory -

Purchase 140,000
Direct material, closing inventory (1,386)
Direct material consumed 138,614
Direct manufacturing labour cost 30,000
Prime cost 168,614
Factory overhead:
Plant energy cost 5,000
Indirect manufacturing labour cost (V) 10,000
Indirect manufacturing labour cost (F) 16,000
Other indirect manufacturing labour cost (V) 8,000
Other indirect manufacturing labour cost (F) 24,000
Total manufacturing cost 207,614
WIP, opening inventory -
WIP, closing inventory -
Cost of goods manufactured 207,614
FG, opening inventory -
Cost of goods available for sale 207,614
FG, closing inventory (20,970)
Cost of goods sold 186,644

Income statement
Revenue 436,800
COGS (186,644)
GP 250,156
Distribution cost (162,850)
Administrative cost (50,000)
Net Operating Income 37,306

Total units produced = 100,000

RM required (100,000*2) 200,000
RM closing inventory 2,000
Direct material inventory cost = 140000/202000*2000 = 1386

Total variable manufacturing cost 167,614

Total units produced 100,000
Per unit manufacturing cost 1.68
FG, closing inventory cost 20,970
FG, closing inventory units 12511

Units sold (100,000-12,511) 87,489

Sales revenue 436,800
Unit selling price 5
Dec-2013, 3(c) – CVP Analysis
By – Kawser Hossain
(i) CM Ratio & Variable Expense Ratio:
We have,
Contribution Margin= 112,500;
Sales= 5000*50 = 250,000
So, CM Ratio= CM/Sales*100 = (112,500/250,000)*100 = 45%
And, Variable Expense Ratio= 100% - CM Ratio = 100%-45% = 55%

(ii) BEP in units and sales Taka

BEP in Sales Tk = Fixed cost/CM Ratio
= {(Sales*CM Ratio)-profit}/ 45%
= {(250,000*45%)-22,500}/0.45
= (112,500-22,500)/0.45
= 90,000/0.45
= 200,000
BEP in Units = BEP in Sales TK/ Unit Selling Price = 200,000/50= 4000 units

(iii) Change in Income

We have,
FC= 90,000,
Total Sales= 250,000+40,000 = 290,000
VC= 290,000*55% = 159,500
We Know,
Profit = Total Sales- FC-VC
=> Profit = 290,000- 90,000- 159,500 = 40,500
Change in Net Income= 40,500-22,500 = 18,000.
 Dec-2013, 5(c) – Cash Flow Statement
By – Kawser Hossain
Taka Taka Taka Taka
Net cash flow from operating Activities
Net Income 84000
Adjustments:
(+) Depreciation Expense 18000
(+) Loss on sale of Equipment 1000
(+) Decrease A/c Receivable 3000
(-) Increase M Inventories (10000)
(+) Decrease prepaid expense 2000
(-) Decrease A/c Payable (8000)
(+) Increase Income T Payable 12000
(-) Increase Acc Exp. Payable (5000)
13000
Net Cash Flow from O A 97000

Cash Flow from Investing Activities

Purchase Equipment (180000)
Sale on Equipment 17000
Net Cash Flows from I A (163000)

Cash Flow from Financing Activities

Bonds Issued 1300000
Bonds paid (32000)
Net Cash Flow from F A 98000
Net Increase /Decrease 32000
Cash beginning 159000
Cash Ending 191000
** Cash Flow from non-operating & non-financing Common stock of Tk 60,000/- was issued to acquire land.
 December-2013, 8(c)
Leasing vs Borrowing (Buying)
PV of Cash Outflows under Leasing Alternative:
PV
Lease Tax Benefit Cash
Year-end Factor PV of Cash outflow
Payments @50% Outflows
@7%

0 220,000 220,000 1.0000 220,000

1-4 220,000 110,000 110,000 3.3872 372,593
5 110,000 -110,000 0.7130 -78,428
514,165

PV of Cash Houtflows under Buying Alternative:

Instalment = Loan Amount / PV Annuity Factor @14% [considering beginning of the period]
= 10,00,000 / 3.9137
= 255,513

Loan Beginning Ending

Year-end Interest Principal
Instalment Balance Balance

0 255,513 1,000,000 255,513 744,487

1 255,513 744,487 104,228 151,284 593,203
2 255,513 593,203 83,048 172,464 420,739
3 255,513 420,739 58,903 196,609 224,129
4 255,513 224,129 31,378 224,135 -5

Depreciation = (Cost - SV)/ No of years

= (1000000 - 0) / 5
= 200000
Tax PV
Year- Loan Interest Tax Benefit Net Cash PV of Cash
Depr Deductable Factor
end Instalment @14% @50% outflow outflow
Expenses @7%

0 255,513 - - 255,513 1.0000 255,513

1 255,513 104,228 200,000 304,228 152,114 103,399 0.9346 96,634
2 255,513 83,048 200,000 283,048 141,524 113,988 0.8734 99,562
3 255,513 58,903 200,000 258,903 129,452 126,061 0.8163 102,903
4 255,513 31,378 200,000 231,378 115,689 139,824 0.7629 106,671
5 - 200,000 200,000 100,000 -100,000 0.7130 -71,299
589,984

The company is advised to go for leasing as PV of cashflows under leasing alternative (514,165) is lower than that under
buying alternative (589,984).