Exercises CVP Analysis

1. ABC company is the exclusive distributor for a book bag in XYZ Company. The product sells for
RM60 unit and has a CM ratio of 40%. The company’s fixed expenses are RM360,000 per year.

Required:
i. What are the variable expenses per unit?
ii. Using the equation method:
a. What are the break-even points in units and sales dollars?
b. What sales level in units and sales dollars is required to earn an annual profit of
RM90,000?
c. Based on answer in (a) and (b), develop the BEP graph.
d. Calculate degree of operating leverage
e. If sales are expected to increase by 15% next year, how much will be the new profit? (Use
DOL in (c) to calculate the effect on net income)
f. Assume that through negotiation with the manufacturer, the ABC company is able to
reduce its variable expenses by RM3 per unit. What is the company’s new break-even
point in units and sales dollars?
iii. Repeat (2) above using the contribution margin method.

2. Fizzy Corporation is a distributor of a sun umbrella used at resort hotels. Data concerning the
next month’s budget appear below:

Selling price ......................RM25 per unit

Variable expense ......................RM15 per unit
Fixed expense ......................RM8,500 per month
Unit Sell ..................... 1,000 units per month

i. Compute the company’s BEP

ii. Compute the company’s margin of safety.