Accounting Business Reporting for Decision Making

CHAPTER 10 Cost–volume–profit analysis 455

c. Explain why Cone Head House’s manager might be willing to sell cones at the minimum

selling price you calculated in part (b).

10.44 Contribution margin ratio  LO2, 3

The Coffee Club sells specialist coffee drinks from a rented cart on the beachside on the Gold

Coast. Provided below is a summarised version of the statement of profit or loss for July 2016.

Sales revenue

Cost of beverages

Cost of napkins

Rent of cart

Wages

$2 500

550

550

1 250

$5 500

4 850

Profit $ 650

The cost of beverages and napkins are classified as variable costs.

Required

a. Calculate the contribution margin ratio.

b. Calculate the break-even sales in dollars.

10.45 Profitability with resource limitations  LO7

Coconut Plantations Pty Ltd manufactures three coconut-based products, candles, soaps and

detergents. On average 75 000 candles, 50 000 soaps and 125 000 detergents are sold. Next year,

the company has a restricted advertising budget of $40 000, which is sufficient to effectively pro-

mote only one of its products. The marketing department estimates that average sales of candles

will increase by 25 per cent if they are advertised, while soaps average sales will increase by

20 per cent and detergents will increase by 10 per cent if they are advertised. The following data

is provided.

Candles Soaps Detergents

Selling price per unit

Variable cost per unit

Machine hours per unit

Fixed costs are estimated to be $600 000.

$25

$15

1 hour

$38

$22

3 hours

$20

$12

1 hour

Required

a. Calculate the contribution margin for each product.

b. Calculate the contribution margin per machine hour for each product.

c. Assuming unlimited machine hours are available, which product should be promoted in the

advertising campaign?

d. Would your answer to (c) change if now there were 300 000 machine hours available for

production?

e. Prepare a statement of profit or loss after you have made your decisions in (c) and (d).

f. Discuss when to use the contribution margins calculated in your answers to (a) and (b) above.

10.46 Relevant information for decision making   LO8

Magic Dusters is considering a special order from Stay Clean Ltd for a special cleaning product

for windows. One ingredient required for the product is Alpha A which Magic Dusters has in its

inventory. Magic Dusters current products do not use Alpha A; however, it was an ingredient in

one of Magic’s discontinued product lines. Alpha A was purchased at a cost of $10 per litre, and

could be currently sold for $5 per litre, with a replacement cost of $12 per litre.

Required

You have been requested to prepare a financial analysis of the special order from Stay Clean Ltd.

Given that 1000 litres of Alpha A are required in production of this order what is the relevant cost

of Alpha A to be included in the analysis?