SOLUTION: Q.

42 FABLE COMPANY

a) BEP = €90,000/€30 = 3,000 units

b) Margin of Safety = (6,000-3,000)/6000 = 50%
c) Target Volume = (€90,000+€30,000)/€30 = 4,000 units

SOLUTION: Q.43 – ABBEY KNITWEAR

a) Break-even points: Units

Singapore € 6,500,000/€32 - €19 = 500,000 units

Thailand € 4,500,000/€32 - €17 = 300,000 units

United States €12,000,000/€32 - €22 = 1,200,000 units

b) Singapore Thailand United States

Contribution €10,400,000 €12,000,000 € 8,000,000
Fixed costs € 6,500,000 € 4,500,000 €12,000,000
Net profit/loss € 3,900,000 € 7,500,000 (€ 4,000,000)
 SOLUTION: Q.44 – AVON COMPANY

Initial Workings:

Selling price €25.00

Variable costs €19.80
Unit contribution € 5.20

Breakeven point = Fixed costs

Unit contribution

= €468,000 = 90,000 units (b)

€5.20

Target sales = Fixed costs + before-tax profit

Unit contribution

= €468,000 + €260,000
€5.20

= 140,000 units (c)

New contribution:

Selling price €25.00

Variable costs €20.20
Unit contribution € 4.80

Breakeven point = €468,000 = 97,500 units (a)

€4.80

Existing CMR = 5.20 = .208

25.00

Let x = required selling price

Then, the CMR will be: SP-VC

SP
= x - €20.20 = .208
x

x - €20.20 = .208 x

∴ .792 x = €20.20

∴ x = €25.51 (a)
SOLUTION: Q.45 MARLING COMPANY.

(a) Break-even point in units:

Fixed costs/Unit contribution = €90,000/€3 = 30,000 bottles.

(b) Break-even point in sales value:

Fixed costs/CMR = €90,000/.5 = €180,000

(c) Number of bottles to be sold to give a profit of €30,000 before tax:

Fixed costs + profit/Unit contribution = €90,000 + €30,000/€3 = 40,000 bottles

(d) Maximum potential profit:

Contribution: 80,000 x €3 = €240,000
Less Fixed Costs € 90,000
Maximum potential profit €150,000

(e) PV ratio = CMR = Contribution per unit/Unit selling price = €3/€6 = 0.5
SOLUTION: Q46. FORECAST COMPANY.

a) €500,000/50,000 = €10 (Selling price)

b) Contribution margin: €10 - €7.50 = €2.50

c) BEP: €60,000/€2.50 = 24,000 units

d) 4,000 x €2.50 = €10,000

e) €110,000/€2.50 = 44,000 units

f) S – VC – FC = P
Let x = level of sales required (in €)
X - .75x – 60,000 = .1(x)
.15x = 60,000
x = €400,000

g) Conversion of after-tax profit into before-tax profit:

€90,000/1 - .4 = €150,000

Target sales (units): €210,000/€2.50 = 84,000 units.

 SOLUTION: Q.47. – WIZARD LTD.

Workings

Product Product Total

A B
Sales €800,000 €1,000,000 €1,800,000
Variable costs 600,000 600,000 1,200,000
Contribution 200,000 400,000 600,000

a) CMR (C/S Ratio) 25% 40% 33⅓%

b) Breakeven point = Fixed costs €350,000 = €1,050,000

= 33⅓%
CMR

c) Required volume of sales (€) Fixed costs + before-tax profit

= CMR

€350,000 + €600,000 = €2,850,000

= 33⅓%

d) New unit contribution

figures:

Product Product Total

A B
Selling price €800 €570
Variable cost €600 €300
Contribution €200 €270
No. of units 3,000 3,000

Contribution (Total) €600,000 €810,000 €1,410,000

Fixed Costs 430,000
Income before taxes 980,000

i) Net income after tax (50%) € 490,000

ii) Breakeven point = €430,000 = €430,000
*CMR 34.3% €1,253,644
=

*CMR = = •343 (or 34.3%)

€1,410,000

€4,110,000
 SOLUTION: Q.48 – HALL COMPANY

(i) PRESENT POSITION.

Units 90,000 p.u.

Sales 360,000 4.00
Variable Cost
Materials 90,000 1.00
Labour 90,000 1.00
Factory O/H 18,000 0.20
Sales Comm. 5% 18,000 0.20
Shipping 3,600 0.04
Admin. 4,500 0.05
224,100 2.49
Contribution 135,900 1.51
Fixed Costs
Factory O/H 80,000
Selling Exp. 40,000
Admin 20,400 140,400
Net Loss (4,500)

(ii) BREAKEVEN VOLUME

140,400/1.51 92,980 units

(iii) 15% PRICE CUT: 150,000 UNITS

Units 150,000
SELLING PRICE 85% X €4 3.40
VARIABLE COST
Materials 1.00
Labour 1.00
Factory O/H 0.20
Sales Comm. 5% x €3 0.17
Shipping 0.04
Admin 0.05 2.46
0.94
Contribution 141,000
Fixed Costs 140,400
Net Profit 600
(iv) 25% PRICE INCREASE

Units 90,000 x 150% 135,000

Selling Price €4 x 125% € 5.00
Variable cost
Materials 1.00
Labour 1.00
Factory O/H 0.20
Sales Comm 10% 0.50
Shipping 0.04
Admin 0.05 2.79
2.21
Contribution 298,350
Fixed Costs
Factory O/H 80,000
Selling Exp. 190,000
Admin 20,400 290,400
NET PROFIT 7,950

(v) Let X = Fixed selling expenses

S – VC – FC = .05S
(0.05S represents the required profit of 5% of sales)

(130,000 x €4) – (130,000 x €2.49) – (100,400 + X) = .05(€520,000)

€520,000 - €323,700 - €100,400 – X = €26,000
€520,000 - €450,100 = X
X = €69,900

∴ Fixed selling expenses can be increased by

€69,900 - €40,000 = €29,900

(vi) Required sales = Fixed costs + profit

Unit contribution

= .9(€140,400) + €20,000
€1.51

= €146,360/€1.51

= 96,927 units
(vii) The price must cover:

Variable costs (excluding sales commission and shipping plus €0.10 for packaging)

€2.49 - €0.24 + €0.10 =€2.35

Let X = price to be quoted for mail-order business

60,000X - €24,000 – 60,000(€2.35) = €4,500

60,000X = €165,000 + €4,500
60,000X = €169,500
X = €2.825

(viii) Existing contribution = €1.51

Less increase in variable costs

(€0.43 - €0.09) (€0.34)
New contribution €1.17

Number of units to be sold to make a profit of €20,000:

€140,400 + €20,000
€1.17 = 137,094 units
QUESTION 49 – SOLUTION: DOONASS TOY COMPANY

X Y Z

Contribution €4 €5 €6
Sales Mix% 0.3 0.3 0.4
Weighted Contribution €1.20 €1.50 €2.40 = €5.10

BEP = €510,000 ÷ €5.10 = 100,000 units

X(30%) = 30,000 units
Y(30%) = 30,000 units
Z(40%) = 40,000 units (Answer C)

ALTERNATIVE METHOD (Using concept of bundles)

X Y Z
Contribution €4 €5 €6
Sales Mix 3 3 4
€12 €15 €24 = €51 per bundle of 10

BEP = €510,000÷€51 = 10,000 bundles of 10

X: 10,000 x 3 = 30,000 units
Y: 10,000 x 3 = 30,000 units
Z: 10,000 x 4 = 40,000 units
QUESTION 50 – SOLUTION: WORK AND GAMES PLC

Desktop Laptop

Contribution €250 €600

Sales Mix % 62.5% 37.5%
Weighted Contribution €156.25 €225 = €381.25

BEP = €2,750,000 ÷ €381.25 = 7,213 UNITS

Desktop: 62.5% x 7,213 = 4,508

Laptop: 37.5% x 7,213 = 2,705

Target Volume = €3,400,000÷ €381.25 = 8,918 units

Desktop: 62.5% x 8,918 x €1,000 = €5,573,750

Laptop: 37.5% x 8,918 x €2,000 = €6,688,500
Total Sales Revenue Required = €12,262,250

Alternative method (using concept of bundles)

Desktop Laptop

Contribution €250 €600

Sales Mix % 5 3
€1,250 €1,800 = €3,050 per bundle of 8

BEP = €2,750,000/€3,050 = 901.6 bundles of 8

Desktop: 901.6 x 5 = 4,508 units

Laptop: 901.6 x 3 = 2,705 units
 SOLUTION: Q.51 - DOWN-TOWN COMPANY

A B C
Selling Price €4,000 €9,000 €14,000
Variable Cost 2,800 5,400 10,500
Contribution 1,200 3,600 3,500

(a) (i) Break-Even Point = €9,170,000

€2,620*

= 3,500 units

A 40% = 1,400
B 40% = 1,400
C 20% = 700

*Weighted Unit Contribution Margin

Units contribution x sales mix €
A €1,200 x .4 480
B €3,600 x .4 1,440
C €3,500 x .2 700
€2,620

(ii) Target Sales

= Fixed Cost + P €9,170,000 + €2,620,000

Unit contribution €2,620

= 4,500 units

A 40% = 1,800 units

B 40% = 1,800 units
C 20% = 900 units

(b) CMR = Weighted Unit Contribution

Weighted Selling Price

= €2,620 = .3275
€8,000

Additional sales x CMR

= €200,000 x .3275 = €65,500

(c) New Weighted Contribution

A €1,200 x 30% = 360

B €3,600 x 30% = 1,080
C €3,500 x 40% = 1,400
€2,840

€9,170,000
Break-even Point = € 2,840 = 3,228 units.

This is a decline in the Break-even point of 272 units (3,500 – 3,228) due to the higher
weighted unit contribution.
QUESTION 52 – SOLUTION: LORIMER PLC

Workings:

Standard Sporty
Sales units 50,000 25,000
Selling price €9.00 €15.00
Unit Variable Cost €4.50 €8.00
Contribution margin €4.50 €7.00

a. Break-even point in units and sales value for 2004

Standard Sporty
Contribution Margin €4.50 €7.00
Sales mix 2 1
€9.00 €7.00

Break-even point = €30,000 ÷ €16

= 18,750 (bundles of 3)

Standard = 18,750 x 2 = 37,500 units

Sporty = 18,750 x 1 = 18,750 units
Total = 56,250 units

Standard = 37,500 x €9 = €337,500

Sporty = 18,750 x €15 = €281,250
Total = €618,750

b. Target sales to achieve a profit of 20% of total sales

Standard Sporty
Contribution Margin €4.50 €7.00
Sales mix % 0.667 0.333
Weighted CM €3.00 €2.333
Total Weighted Contribution Margin = €5.333

Standard Sporty
Selling Price €9.00 €15.00
Sales mix % 0.667 0.333
Weighted SP €6.00 €5.00
Total Weighted Selling Price = €11

Weighted Contribution Margin Ratio = €5.333 ÷ €11 = 0.4848

S – VC – FC = 0.2S

Let X = Required Sales

CMR = 0.4848
VC = 1- 0.4848 = 0.5152

X – 0.5152X - €300,000 = 0.2X

0.2848X = €300,000
X = €1,053,370

c. Workings for 2005

Standard Sporty
Selling price €9.00 €15.00
Unit Variable Cost €4.95 €8.80
Contribution margin €4.05 €6.20
2 1
€8.10 €6.20

Weighted contribution margin = €14.30

i. BEP (Sales Manager’s suggestion not implemented)

BEP = €360,000 ÷ €14.30 = 25,175 (bundles of 3)

Standard: 25,175 x 2 = 50,350

Sporty: 25,175 x 1 = 25,175
= 75,525 units

ii. BEP (Sales Manager’s suggestion is implemented)

Standard Sporty
Contribution Margin €4.05 €6.20
Sales mix 3 1
€12.15 €6.20

Weighted contribution margin = €18.35

BEP = €390,000 ÷ €18.35 = 21,253 (bundles of 4)

Standard: 21,253 x 3 = 63,759

Sporty: 21,253 x 1 = 21,253
= 85,012 units

d. Margin of Safety
Margin of Safety Percentage = (Budgeted Sales – Break-even Sales) ÷ Budgeted Sales

The margin of safety percentage answers the “what if” question. By what percentage can
budgeted revenue drop before the break-even point is reached?
QUESTION 53. – SOLUTION: SHY LIMITED AND BOLD LIMITED

Shy Ltd Bold Ltd

€ €
Incremental Sales 200,000 200,000
Incremental Costs 140,000 60,000
Contribution 60,000 140,000

CMR 30% (=0.3) 70% (=0.7)

Fixed Costs calculation:

€ €
Sales 1,200,000 1,200,000
Variable Costs (70%) 840,000 (30%) 360,000
Contribution (30%) 360,000 (70%) 840,000
Fixed Costs (missing) 200,000 (missing) 600,000
Profit (given) 160,000 (given) 240,000

(a) BEP: €200,000÷0.3 €600,000÷0.7

= €666,667 = €857,143

(b) Target Volume (for shy only)

= €440,000÷0.3
= €1,466,667

(c) Margin of Safety in 2005 (for bold only)

= €1,200,000 - €857,143
= €342,857

(iv) Shy Ltd Bold Ltd

€ €
Sales 700,000 700,000
Variable Costs (70%) 490,000 (30%) 210,000
Contribution (30%) 210,000 (70%) 490,000
Fixed Costs 200,000 600,000
Profit 10,000 Loss 110,000