Question

Particulars	Brakepad	Gear
Direct Material	RM 8	RM 6
Direct Labour	24 hours @ RM0.25 per hour	16 hours @ RM 0.25 per hour
Selling Price	RM 25	RM 20
Variable Overhead	150% of direct labour
Fixed Overhead	RM 750

The directors want to be acquainted with the desirability of adopting any one of the following alternative sales mixes in the budget for the next period:

1. 150 units of Brakepad and 350 units of Gear        
2. 350 units of Brakepad and 150 units of Gear
3. 400 units of Brakepad and 100 units of Gear
4. 100 units of Brakepad and 400 units of Gear
5. 250 units of Brakepad and 250 units of Gear
6. 300 units of Brakepad and 300 units of Gear
7. 500 units of Brakepad only
8. 500 units of Gear only

REQUIRED;

1. Compute the net profit for each of the above alternatives.

                                                                                                                                                 (24 marks)

2. Choose the best alternative for the management.                                                               

                                                                                                                                                      (1 mark)

Answer 1

A Cost Volume Profit Analysis helps to determine the profitability of a product on the basis of change in volume of sales and costs. For this, it considers Sales, variable expenses, fixed expenses and the contribution margin.
Contribution margin is the difference between Sales and variable expenses. In this case variable expenses are direct materials, direct labor and variable overhead.

Direct materials per unit:
Brakepad = RM 8
Gear = RM 6

Direct labor per unit:
Brakepad = 24 hours @ RM0.25 per hour = 24 × 0.25 = RM 6

Gear = 16 hours @ RM0.25 per hour = 16 × 0.25 = RM 4

Variable overhead per unit:
Brakepad = 150% of direct labor = RM 6 × 150% = RM 9

Gear = 150% of direct labor = RM 4 × 150% = RM 6

a. A Contribution margin income statement is prepared to ascertain the net profit of each alternatives.

a. 150 units of Brakepad and 350 units of Gear CVP Analysis Brakepad Gear Total Units sold 150 units 350 units Selling price per unit RM 25 RM 20 Sales 3,750 7,000 10,750 Less: Variable Expense Direct Materials 1,200 2,100 3,300 Direct labor 900 1,400 2300 Variable Overhead (150% of DL) 1,350 2,100 3,450 Contribution margin 300 1,400 1,700 Less: Fixed overhead 750 Net profit 950 b. 350 units of Brakepad and 150 units of Gear CVP Analysis Brakepad Gear Total Units sold 350 units 150 units Selling price per unit RM 25 RM 20 Sales 8,750 3,000 11,750 Less: Variable Expense Direct Materials 2,800 900 3,700 Direct labor 2,100 600 2,700 Variable Overhead (150% of DL) 3,150 900 4,050 Contribution margin 700 600 1,300 Less: Fixed overhead 750 Net profit 550 C. 400 units of Brakepad and 100 units of Gear CVP Analysis Brakepad Gear Total Units sold 400 units 100 units Selling price per unit RM 25 RM 20 Sales 10,000 2,000 12,000 Less: Variable Expense Direct Materials 3,200 600 3,800 Direct labor 2,400 400 2,800 Variable Overhead (150% of DL) 3,600 600 4,200 Contribution margin 800 400 1,200 Less: Fixed overhead 750 Net profit 450

d. 100 units of Brakepad and 400 units of Gear CVP Analysis Brakepad Gear Total Units sold 100 units 400 units Selling price per unit RM 25 RM 20 Sales 2,500 8,000 10,500 Less: Variable Expense Direct Materials 800 2,400 3,200 Direct labor 600 1,600 2,200 Variable Overhead (150% of DL) 900 2,400 3,300 Contribution margin 200 1,600 1,800 Less: Fixed overhead 750 Net profit 1,050 e. 250 units of Brakepad and 250 units of Gear CVP Analysis Brakepad Gear Total Units sold 250 units 250 units Selling price per unit RM 25 RM 20 Sales 6,250 5,000 11,250 Less: Variable Expense Direct Materials 2,000 1,500 3,500 Direct labor 1,500 1,000 2,500 Variable Overhead (150% of DL) 2,250 1,500 3,750 Contribution margin 500 1,000 1,500 Less: Fixed overhead 750 Net profit 750 f. 300 units of Brakepad and 300 units of Gear CVP Analysis Brakepad Gear Total Units sold 300 units 300 units Selling price per unit RM 25 RM 20 Sales 7,500 6,000 13,500 Less: Variable Expense Direct Materials 2,400 1,800 4,200 Direct labor 1,800 1,200 3,000 Variable Overhead (150% of DL) 2,700 1,800 4,500 Contribution margin 600 1,200 1,800 Less: Fixed overhead 750 Net profit 1,050

Total Gear O units 12,500 g. 500 units of Brakepad only CVP Analysis Brakepad Units sold 500 units Selling price per unit RM 25 Sales 12,500 Less: Variable Expense Direct Materials 4,000 Direct labor 3,000 Variable Overhead (150% of DL) 4,500 Contribution margin 1,000 Less: Fixed overhead Net profit 4,000 3,000 4,500 1,000 750 250 h. 500 units of Gear only CVP Analysis Brakepad Gear Total Units sold O units 500 units Selling price per unit RM 20 Sales 10,000 10,000 Less: Variable Expense Direct Materials 3,000 3,000 Direct labor 2,000 2,000 Variable Overhead (150% of DL) 3,000 3,000 Contribution margin 2,000 2,000 Less: Fixed overhead 750 Net profit 1,250

a. The sales mix of 500 units of Gear only is the best alternative for the management as it produces a contribution margin of RM 2,000 and a net profit of RM 1,250 which is higher than all other alternatives.