Accounting Business Reporting for Decision Making

CHAPTER 10 Cost–volume–profit analysis 459

Cost behaviour seems to follow this pattern: all of the cost of sales is considered variable;

50 per cent of the total marketing and distribution costs are variable; and 40 per cent of the total

administration costs are variable.

Required

a. Calculate the number of units that are needed to be sold in 2016 to break even.

b. The finance manager has developed a number of alternative plans to get the entity back into

profitability. One of the plans relates to switching to a more reliable supplier of raw materials,

which will increase the cost of sales per unit by $0.80. A change in marketing strategy will see

variable marketing and distribution increase by $0.10, and fixed marketing and distribution

decrease by $60 000. Competitive forces would allow an increase in selling price of only

$0.50 per unit. On the information available, would you advise a switch to this alternative

plan?

c. Prepare a statement of profit or loss for both alternatives given in (b).

d. Explain the concept of operating leverage as it relates to your answer in (b).

10.56 Break-even: multiple products; contribution margin ratio    LO2

Taff Services offers three core accounting and bookkeeping services. After a cost behaviour

study, the following profitability analysis has been prepared.

Taff Services

Profitability analysis for 12 months ending 31 December 2016

Bookkeeping Advisory Account management Total

Fees

Less: Variable costs

Contribution margin

Direct fixed costs

Common fixed costs

Utilities

Other administration

Total fixed costs

Profit

$ 300 000

180 000

120 000

25 000

$ 160 000

96 000

64 000

35 000

$120 000

72 000

48 000

18 000

$

$

580 000

348 000

232 000

78 000

31 000

36 000

145 000

87 000

The management of Taff Services estimates that the total fees mix (52%:28%:20%) is generally

representative.

Required

a. Calculate the contribution margin ratios for each of the three areas of activity, and in total.

b. Using the total contribution margin ratio, calculate the level of fees required to break even.

c. Prepare a statement of profit or loss at break-even level of fees as calculated in (b).

10.57 Break-even units; targeted profit units; changes to cost structure    LO2, 6

Winslet Company has the capacity to manufacture 100 000 units annually of its only product.

The following information is available.

Selling price

Variable manufacturing costs

Fixed manufacturing costs

Fixed marketing and administrative costs

Variable marketing and administrative costs

$52 per unit

$24 per unit

$360 000 annually

$240 000 annually

$8 per unit

Required

a. Calculate the number of units that need to be sold annually to break even.

b. How many units would need to be sold to earn a target annual profit of $240 000?

c. In an attempt to achieve better results in the marketplace, management has been looking at

changing the reward system for marketing, distribution and sales personnel. This would result