MANAGERIAL ACCOUNTING

III. Cost-Volume-Profit Analysis (CVP)

1. CVP, changing revenues and costs

Soleil Voyages SA is a travel agency specialising in flights between Paris and London. It books
passengers on Air Chanson. Air Chanson charges passengers €1000 per round-trip ticket. Soleil
Voyages receives a commission of 8% of the ticket price paid by the passenger. Soleil Voyages’s fixed
costs are €22 000 per month. Its variable costs are €35 per ticket, including an €18 delivery fee by
Lievre-Express SA. (Assume each ticket purchased is delivered in a separate package; thus the
delivery fee applies to every individual ticket.)
Questions:
1) What is the number of tickets Soleil Voyages must sell each month to (a) break even, and (b)
make a target operating profit of €10 000?
2) Assume Tortue-Express SA offers to charge Soleil Voyages only €12 per ticket delivered. How
would accepting this offer affect your answers to (a) and (b) in requirement 1?

2. CVP, changing revenues and costs (continuation of Exercise 1)

Air Chanson changes its commission structure to travel agents. Up to a ticket price of €600, the
8%commission applies. For tickets costing €600 or more, there is a fixed commission of €48. Assume
Soleil Voyages has fixed costs of €22 000 per month and variable costs of €29 per ticket (including a
€12 delivery fee by Lievre-Express).
Questions:
1) What is the number of Paris-to-London round-trip tickets Soleil Voyages must sell each
month to (a) break even, and (b) make a target operating profit of €10 000?
2) Soleil Voyages decides to charge its customers a delivery fee of €5 per ticket. How would this
change affect your answers to (a) and (b) in requirement 1?
3) Comment of the results.

III. Cost-Volume-Profit Analysis (CVP)

 MANAGERIAL ACCOUNTING

3. CVP, changing cost inputs

Maria Kabaliki is planning to sell a vegetable slicer-dicer for €15 per unit at a country fair. She
purchases units from a local distributor for €6 each. She can return any unsold units for a full refund.
Fixed costs for booth rental, set-up and cleaning are €450.
Questions:
1) Calculate the breakeven point in units sold.
2) Suppose the unit purchase cost is €5 instead of €6, but the selling price is unchanged.
Calculate the new breakeven point in unit sold.

III. Cost-Volume-Profit Analysis (CVP)

 MANAGERIAL ACCOUNTING

4. CVP, international cost structure differences

Knitwear Ltd is considering three countries for the sole manufacturing site of its new sweater;
Cyprus, Turkey and Ireland. All sweaters are to be sold to retail outlets in Ireland at €32 per unit.
These retail outlets add their own mark-up when selling to final customers. The three countries differ
in their fixed costs and variable costs per sweater.

In € Annual fixed costs (€) Variable Variable marketing and

manufacturing costs distribution costs per
per sweater sweater

Cyprus 6.5 million 8.00 11.00

Turkey 4.5 million 5.50 11.50

Ireland 12.0 million 13.00 9.00

Questions:
1) Calculate the breakeven point of Knitwear Ltd in both (a) units sold, and (b) revenues for
each of the three countries considered for manufacturing the sweaters.
2) If Knitwear Ltd sells 800 000 sweaters in 2018, what is the budgeted operating profit for each
of the three countries considered for manufacturing the sweaters? Comment on the results.

III. Cost-Volume-Profit Analysis (CVP)

 MANAGERIAL ACCOUNTING

5. CVP, 3 products

A company sells three products: D, E and F. The market for the products dictates that the numbers of
products sold are always in the ratio of 3D:4E:5F.
Budgeted sales volumes and prices, and cost details for the previous period were as follows:

D E F
Sales units 300 400 500
Selling price per unit £80 £55 £70
Contribution to sales ratio 70% 65% 50%

The budgeted total fixed costs for that period were £31 200.

Calculate for that period:

1) The breakeven sales revenue.
2) The volume of each product that would have needed to be sold if the company had wanted
to earn a profit of £29 520 in that period.

III. Cost-Volume-Profit Analysis (CVP)

 MANAGERIAL ACCOUNTING

6. Margin of safety

GF is a company that manufactures clothes for the fashion industry. The fashion industry is fast
moving and consumer demand can change quickly due to the emergence of new trends.
GF manufactures three items of clothing: the S, the T and the B using the same resources but in
different amounts.
Budget information per unit is as follows:
S (€) T(€) B(€)

Selling price 250 40 100

2 100 10 30
Direct materials (€20 per m )
Direct labour ($12 per hour) 36 12 27
Variable overhead ($3 per machine hour) 9 3 6.75

Total fixed costs are €300 000 per month.

Included in the original budget constructed at the start of the year, was the sales demand for the
month of March as shown below:
S T B
Demand in March (units) 2000 6000 4000

After the original budget had been constructed, items of clothing S, T and B have featured in a
fashion magazine. As a result of this, a new customer (a fashion retailer), has ordered 1000 units
each of S, T and B for delivery in March. The budgeted demand shown above does not include this
order from the new customer.
In March there will be limited resources available. Resources will be limited to: direct material 14500
m2, direct labour 30 000 hours.
There will be no opening inventory of material, work in progress or finished goods in March.
The board of directors have now addressed the shortage of key resources at GF to ensure that
production will meet demand in April. The production plan for the month of April is shown below:
S T B

Production (units) 4 000 5 000 4 000

Calculate for April:

1) Calculate the breakeven sales revenue for the given product mix in the production plan
2) Calculate the margin of safety percentage.

III. Cost-Volume-Profit Analysis (CVP)

 MANAGERIAL ACCOUNTING

III. Cost-Volume-Profit Analysis (CVP)