Accounting Business Reporting for Decision Making

448 Accounting: Business Reporting for Decision Making

b. Break-even units for 2016:

Break-even units =

$480 000

$50 – $30

= 24 000 units

c. Break-even units for 2017:

Break-even units =

$420 000

($50 – $34)

=26 250 units

Therefore, the break-even units under the new plan increase by 2250 units.

Comprehension questions

10.3 Explain the assumptions underlying cost–volume–profit (CVP) analysis. LO4

10.4 Using examples, distinguish between fixed and variable costs. LO1

10.5 Discuss the circumstances in which CVP analysis might be useful. LO5

10.6 Explain the weighted average contribution margin concept. LO2

10.7 Discuss the concept of operating leverage. LO6

10.8 How does the calculation of break-even differ between single product and multi-product

entities? LO2

10.9 Explain the meaning of the term ‘mixed cost’ and give five examples of mixed costs. LO1

10.10 What is a qualitative advantage of making rather than buying a component? LO9

10.11 How may an opportunity cost be relevant in an outsourcing decision? LO9

10.12 What are avoidable costs and why are they important in decision making? LO8

10.13 ‘Fixed costs are always irrelevant in decision making.’ Discuss. LO8

10.14 When making a non-routine operating decisions are all future costs relevant? Explain. LO8

10.15 An organisation is currently operating at full capacity. Should it accept a request for

a special order based on variable cost plus 40 per cent? Explain. LO10

10.16 If an entity has a mixed cost function, a 10 per cent increase in sales volume should

increase income by more than 10 per cent. Explain why. LO5

10.17 Discuss the effect on CVP analysis of a lower income tax rate. LO5

10.18 Discuss how knowledge of the break-even point and the margin of safety will assist

management in its risk assessment of business operations. LO5

10.19 Explain the importance of the relevant range in relation to cost behaviour when

considering the costs of expanding business activities. LO8

Exercises

 BASIC |  MODERATE |  CHALLENGING

10.20  LO2

Find the missing figures for each of the independent cases shown below.

(Hint: Reconstruct the statement of profit or loss for each scenario.)

Selling

price/unit

Variable

costs/unit Units sold

Contribution

margin (total) Fixed costs Profit (loss)

$ 0

20

10

g.

15

$

a.

15

8

80

i.

10 000

c.

e.

1 000

1 500

$ 200 000

22 500

f.

12 000

j.

$ 120 000

d.

3 000

8 000

6 500

b.

$0

(1 500

h.

(2 000

)

)