Question

cost volume profit analysis

The Woodcraft Company produces thin limestone sheets that are used for the facings on buildings. As can be seen in the contribution margin statement, last year the company had a net profit of S157 500, based on sales of 1800 tonnes. The manufacturing capacity of the firm's facilities is 3000 tonnes per year Woodcraft Company Contribution Margin Statement Year ded 31 December $900 000 Sales Variable costs Manufacturing Selling costs Total variable costs Contribution margin Fixed costs: Manufacturing $315 000 180 000 $495 000 $405 000 $100 000 107 500 40 000 Administrative Total fixed costs Net profit $247 500 $157 500 Required: 1. Calculate the company's break-even volume, in tonnes, for the most recent year. (Ignore 2 Marks 2. If the sales volume is estimated to be 2100 tonnes in the next year, and if the prices and costs stay at the same levels and amounts, what net profit can management expect next year? 2 Marks] 3. The company has an overseas customer who has offered to buy 1500 tonnes at $450 per tonne. Assume that all the firm's costs would be at the same levels and rates as in the year just ended. What net profit would the firm earn if it took this order and rejected some business 2 Marks] 4. Woodcraft plans to market its product in a new territory. Management estimates that an advertising and promotion program costing S61 500 per year would be needed for the next two or three years. In addition, a $25 per tonne sales commission to the sales force in the new territory, over and above the current commission, would be required. How many tonnes would need to be sold in the new territory to maintain the firm's current net profit? Assume that sales and costs will continue as in the year just ended in the firm's established territories 5 Marks 5. Management is considering replacing its labour-intensive production process with an automated production system. This would result in an increase of $58 500 annually in fixed manufacturing costs. The variable manufacturing costs would decrease by $25 per tonne I5 Marksl 6. Ignore the facts presented in requirement 5. Assume that management estimates that the selling price per tonne will decline by 10 per cent next year. Variable costs will increase by $40 per tonne, and fixed costs will not change. What sales volume in dollars would be 4 Marks] income taxes.) from local customers so as not to exceed production capacity? Calculate the new break-even volume in tonnes and in sales dollars required to earn a net profit of S94 500?

Answer 1

1). Breakeven point in tonnes = $1,100 per tonne

Working:

Sale Units	1,800
Sales Revenue	$ 900,000
Minus: Variable costs	495,000
Total Cintribution Margin	405,000
Minus: Total Fixed Costs	247,500
Net Profit	157,500
CM per tonne (405,000 / 1,800)	$ 225.00
Breakeven point in tonnes (247,500/$225)	1,100

　

2) Net profit: 225,000

Working:

Unit sales in tonnes	2,100
Sales Revenue (900000*2100/1800)	$ 1,050,000
Minus: Variable costs (495000*2100/1800)	577,500
Minus: Variable costs	472,500
Total Fixed Costs	247,500
Net Profit	225,000
CM per tonne (472,500 / 2,100)	$ 225.00

　

3) Net profit: 352,500

Working:

Present Selling Price per tonne (1,050,000 / 2,100)	$ 500.00
Variable costs per tonne (577,500 / 2,100)	275
Unit sales in tonnes	3,000
Sales Revenue [(1500*500)+(1500*450)]	$ 1,425,000
Minus: Variable costs [3000*275]	825,000
Total Contribution Margin	600,000
Total Fixed Costs	247,500
Net Profit	352,500
CM per tonne [600,000 / 3,000]	$ 200.00

　

4) Solution: 2,333 tonnes

Working:

New fixed costs [247,500 + 61,500]	309,000
New Variable costs (275 +25)	300
New CM per tonne (500-300)	200
Desired profits	$ 157,500
Add Fixed Costs	$ 309,000
Required CM	$ 466,500
Required tonnes to be sold [466,500 / 200]	2,333

　

5) Solution: New Breakeven Point in tonnes is 1,224 tonnes

Working:

New fixed costs (247500+58500)	$ 306,000
New Variable costs (275 +25)	$ 250
New CM per tonne (500-250)	$ 250
New Breakeven Point in tonnes (306,000 / 250)	1,224

　

6) Solution: Sales volume in units: 2533 units; Sales ($): $1,140,000

Working:

New SP per tonne	450
New VC per tonne (275+ 40)	315
New Contribution Margin per unit	135
Desired Profits	94,500
Fixed costs	247,500
Required Contribution Margin	342,000
Requires tonnes sales (342,000 / 135)	2,533
Required sales in dollars (450* 2,533)	$ 1,140,000