Question

Q1. A car rental agency rents small, medium and family-sized cars. What assumptions would be made for the purpose of a CVP analysis? Does this mean that CVP analysis is of little value to this business? Explain your answer. Q2. The Brisbane Nets, a netball team, play their weekly games at a large stadium in Milton. The stadium holds 6 000 people and tickets sell for $40 each. The team's management estimates that the team's annual fixed costs are $720 000 and that the variable cost per ticket sold is $4. (In the following requirements, ignore income taxes.) Required: 1. If the stadium is two-thirds full for each game, how many games must the team play to break even? 2. What is the safety margin if the team plays a 10-game season and the team management expects the stadium to be 45 per cent full for each game? 3. If the team plays a 10-game season and the stadium is 40 per cent full for each game, what ticket price would the team have to charge in order to break even? Q3. Lucid Images Ltd manufactures premium high definition televisions. The firm's fixed costs are $4 000 000 per year. The variable cost of each TV is $2000, and the TVs are sold for $3 000 each. The company sold 5 000 TVs during the previous year. (In the following requirements, ignore income taxes.) Required: Treat requirements 1 to 4 as independent situations 1. Calculate the break-even point in units. 2. What will the new break-even point be if fixed costs increase by 10 per cent? 3. What was the company's net profit for the previous year? 4. The sales manager believes that a reduction in the sales price to $2 500 will result in orders for 1 200 more TVs each year. What will the break-even point be if the price is changed?

Answer 1

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Answer 1

The assumptions are:

1. Both costs and revenue are linear throughout the activity range that means per unit data does not change. It is not possible in long run because of bulk discounts and step based costing.

2. Costs are either fixed or variable. It is also not possible in long run because all costs are variable in long run.

3. Costs are change only due to change in activity. This assumption is also not viable because when demand increases then the relation ship between costs and activity will not be same as before.

4. Sell price or sale mix is assumed constant. This assumption is not correct because it may happen that a certain product's demand increase changing the sales mix.

It does not means CVP is of little value. CVP is used to identify if the business is able to recover at least its variable costs or not.

Answer 2
Answer 2- Part 1	Amount $	Note
Sell price	40.00	A
Less: Variable cost	4.00	B
Contribution margin per unit	36.00	C
Annual fixed costs	720,000.00	D
Breakeven number of people	20,000.00	E=D/C
Capacity to hold people in 1 game	6,000.00	F
Number of people in 1 game	4,000.00	G=F/3*2
Games to be played for breakeven	5.00	H=G/E
Answer 2- Part 2
Capacity to hold people in 1 game	6,000.00	See F
Number of people in 1 game	2,700.00	I=F*45%
Total Games played	10.00	J
Total number of people	27,000.00	K=I*J
Less: Breakeven number of people	20,000.00	See E
Margin of safety (number of people)	7,000.00	L=K-E
Margin of safety ($)	280,000.00	M=L*A
Answer 2- Part 3
Capacity to hold people in 1 game	6,000.00	See F
Number of people in 1 game	2,400.00	N=F*40%
Total Games played	10.00	See J
Total number of people	24,000.00	O=N*J
Annual fixed costs	720,000.00	See D
Fixed costs per unit	30.00	P=D/O
Add: Variable cost	4.00	See B
Sell price for breakeven	34.00	Q=P+B
Answer 3
Answer 3- Part 1	Amount $
Sell price	3,000.00	R
Less: Variable cost	2,000.00	S
Contribution margin per unit	1,000.00	T
Annual fixed costs	4,000,000.00	U
Breakeven units	4,000.00	V=U/T
Answer 3- Part 2
Annual fixed costs	4,000,000.00	See U
Increase by 10%	400,000.00	W=U*10%
Revised fixed costs	4,400,000.00	X=U+W
Contribution margin per unit	1,000.00	See T
Revised Breakeven units	4,400.00	Y=X/T
Answer 3- Part 3	Amount $
Sell price	3,000.00
Variable cost	2,000.00
Contribution margin per unit	1,000.00	See T
Units sold	5,000.00	Z
Total Contribution	5,000,000.00	AA=T*Z
Annual fixed costs	4,000,000.00	See U
Net profit for previous year	1,000,000.00	AB=AA-U
Answer 3- Part 4	Amount $
Revised Sell price	2,500.00	AC
Variable cost	2,000.00	See S
Revised Contribution margin per unit	500.00	AD=AC-S
Annual fixed costs	4,000,000.00	See U
Breakeven units	8,000.00	AE=U/AD