LECTURE ILLUSTRATION I- COST VOLUME PROFIT ANALYSIS
Forza Ltd. manufacture coffee tables. The following information shows the costs
associated with producing these tables:
Direct Materials Each table requires 4kg of materials. The materials cost $3
per kg.
Direct Labour An employee takes two hours to complete each table.
Employees are paid $7 per hour.
Machine Time Each table requires 1 hour of machine time. Machine time
costs $3 per hour.
Sales Commission Salesman receive $5 commission for every table they sell.
Fixed Costs $240,000
Selling Price $50
Required
1. Calculate the variable cost per table.
Cost per table
Direct Materials 12
Direct Labour 14
Machine Time 3
Sales Commission 5
Total Variable Cost 34
2. What is the contribution margin on each table?
Selling Price 50
Less Variable Cost 34
Contribution Margin 16
Each table sold contributes $16 towards the payment of fixed
costs.
3. What profit will Forza Ltd. make if they sell 19,000 tables?
Profit = SP(X) - VC(X) - FC
Profit = 50(19,000) – 34 (19,000) – 240,000
Profit = 64,000
4. If the company aims to make a profit of $40,000, how many tables must be
sold?
Profit = SP(X) - VC(X) - FC
40,000 = 50(X) – 34 (X) – 240,000
40,000 = 16X - 240,000
40,000 + 240,000 = 16X
280,000 = 16X
280,000/16 = X
17,500 = X
5. How many tables need to be sold to break-even?
Profit = SP(X) - VC(X) - FC
0 = 50(X) – 34 (X) – 240,000
240,000 = 16X
240,000/16 = X
15,000 = X
6. What is the margin of safety on the tables?
Exclude this question
7. If it is estimated that 20,000 tables are to be sold, what is the break even
selling price?
Profit = SP(X) - VC(X) - FC
0 = SP(20,000) – 34 (20,000) – 240,000
0 = 20,000SP – 680,000 – 240,000
680,000 + 240,000 = 20,000SP
920,000 = 20,000SP
920,000/20,000 = SP
$46 = SP
LECTURE ILLUSTRATION II – CVP IN PRACTICE
The Curtin Future Business Leaders (CFBL) are planning a one-day seminar for students
to take place this month. The seminar is designed to (1) outline employment
opportunities, (2) improve skills in the areas of CV development, interviews, cover letters
and general business communication and (3) arrange internship positions with leading
firms. The seminar is supported by various professional associations and business
organisations and will feature an internationally renowned guest speaker. As a member
of the CFBL organising committee, you’ve been given the following estimates in relation
to the event:
Lunches, morning and afternoon teas. $18 per person
Cost to advertise the event. $300
Participant Materials $12 per person
Fee to be paid to the guest speaker. $8001
Hire of equipment (i.e. microphone, $3501
speakers, overhead projector).
Cameraman to film the event. $3601
Estimated number of people who will 40
attend if the fee is $90 per person.
Note
1
A 10%, non refundable deposit was paid on these items. The items can be cancelled
without incurring additional cost if done so one week prior to the event.
Required
a) If it is estimated 50 people will attend the seminar, what is the break-even selling
price? How can this information be used?
Profit = SP(X) - VC(X) - FC
0 = SP(50) – 30(50) – 1,810
0 = 50SP – 1,500 – 1,810
1,810 + 1,500 = 50SP
3,310/50 = SP
$66.20 = SP
b) How many people need to attend to break-even?
Profit = SP(X) - VC(X) - FC
0 = 90(X) – 30(X) – 1,810
1,810 = 60X
1,810/60 = X
30.16 = X
31 people = X
d) At a meeting held one week before the event the committee learns that only 19 tickets
have been sold. If no further tickets are sold, what gain or loss will be made on the
event?
Profit = SP(X) - VC(X) - FC
Profit = 90(19) – 30(19) – 1,810
Profit = (670)
e) What loss will be incurred if the committee decides to cancel the event?
Advertising 300
Fees to Guest Speaker 80
Equipment Hire 35
Cameraman 36
TOTAL COST 451
LECTURE ILLUSTRATION III – SPECIAL ORDER
Forza Ltd. manufacture coffee tables. The following information shows the costs
associated with producing these tables:
Direct Materials Each table requires 4kg of materials. The materials cost $3
per kg.
Direct Labour An employee takes two hours to complete each table.
Employees are paid $7 per hour.
Machine Time Each table requires 1 hour of machine time. Machine time
costs $3 per hour.
Sales Commission Salesman receive $5 commission for every table they sell.
Fixed Costs $240,000
Selling Price $50
Forza Ltd are currently manufacturing 18,400 tables, but have the capacity to
manufacture 20,000 per year. A large furniture retailer has contacted Forza Ltd and
would like to purchase 3,700 tables and has offered to pay $42 for each table.
Required
a) Determine whether this offer is acceptable.
Income (3,700 x $42) 155,400
Less Variable Costs (3,700 x $34) (125,800)
Less Opportunity Costs (2,100 x $16) (33,600)
Contribution margin under normal conditions
Less Any Additional Fixed Costs 0
Gain/Loss (4,000)
b) Would the offer be acceptable if the furniture retailer ordered 2,650 products?
Income (2,650 x $42) 111,300
Less Variable Costs (2,650 x $34) (90,100)
Less Opportunity Costs (1,050 x $16) (16,800)
Less Any Additional Fixed Costs 0
Gain/Loss 4,400
c) What is the minimum price Forza could accept if the order was for 2,950
products?
Gain/Loss 0
Add any Additional Fixed Cost 0
Add Opportunity Costs (1,350 x $16) 21,600
Add Variable Costs (2,950 x $34) 100,300
Income 121,900
Minimum Price = 121,900/2,950
Minimum Price = $41.32
