Chapter 23

Notes to teachers
1

Cost-Volume-Profit Analysis

Teachers are advised to give students a brief introduction to the concepts of break-even quantity and sales revenue (i.e., profit = 0), below which a loss is incurred and above which a profit is earned. A graph showing cost, revenue and profit is useful in explaining the cost-volume-profit (CVP) relationship. After students have mastered the CVP relationship, illustrate the concepts of variable costs, fixed costs and contribution margin. Examples should be used to explain the different methods used to calculate the break-even point: equation, contribution margin and graphic. After that, apply these methods to target profit analysis and the situations of changing the selling price, fixed costs and sales volume. It is necessary to emphasise that the contribution margin is used to cover the fixed costs. After the fixed costs are covered, any amount remaining represents net profit. Explain briefly the assumptions used in cost-volume-profit analysis. The margin of safety concept is then explained by a profit-volume graph. After gaining confidence in dealing with simple situations, students are then taught to tackle more complicated examples of multiple products and limiting factors.

2 3

4 5 6

Q1 Q2

The break-even point is the level of activity where total sales revenue equals total costs. The cost-volume-profit analysis helps management find out how total costs and total sales revenue change with different levels of production or sales. It allows management to know how many units of output have to be produced and sold in order to break even (i.e., cover fixed costs). The contribution margin is the difference between the unit selling price and unit variable costs of a product. It can also be expressed as the difference between total sales revenue and total variable costs. If BAFS Catering Ltd sells 90,000 lunch boxes, it will suffer a net loss of $420,000.
Sales (90,000 $20) Less Variable costs (90,000 $8) Contribution margin Less Fixed costs Net loss $ 1,800,000 (720,000) 1,080,000 (1,500,000) (420,000)

Q3 Q4

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Q5 If BAFS Catering Ltd sells 170,000 lunch boxes, it will make a net profit of $540,000.
Sales (170,000 $20) Less Variable costs (170,000 $8) Contribution margin Less Fixed costs Net profit $ 3,400,000 (1,360,000) 2,040,000 (1,500,000) 540,000

Q6 Three methods can be used to calculate the break-even point: equation method, contribution margin
method and graphic method (cost-volume-profit graph)

Q7 Q8

The break-even point can be expressed in terms of units sold and in sales revenue. If advertising fees are now $200,000, BAFS Catering Ltd should carry out the advertising campaign as the net profit will increase by $40,000 to $940,000. The X-axis of the CVP graph shows the volume and the Y-axis shows the dollar amount in costs or revenue. The PV graph shows the relationship between number of units of product sold and its related profit. The X-axis of the PV graph shows the volume (units sold) and the Y-axis shows the net profit amount.

Q9 The CVP graph shows the relationship between costs, volume (units produced and sold) and revenue.

Q10 The company needs to sell 180,000 lunch boxes to generate a net profit of $660,000.
Sales (180,000 $20) Less Variable costs (180,000 $8) Contribution margin Less Fixed costs Net profit $ 3,600,000 (1,440,000) 2,160,000 (1,500,000) 660,000

Q11 When BAFS Catering Ltd sells 175,000 lunch boxes, it generates revenue of $3,500,000 and earns a net
profit of $600,000. The break-even sales revenue is $2,500,000 and the break-even sales volume is 125,000 lunch boxes. The company can afford to lose sales of 50,000 lunch boxes (175,000 125,000) or sales revenue of $1,000,000 ($3,500,000 $2,500,000) before it reports a loss.

Q12 (a) Margin of safety = $750,000 $500,000 = $250,000 Margin of safety ratio = $250,000 $750,000 = 331/3%
(b)  The margin of safety ratio tells how far the sales volume or sales revenue has to drop in percentage terms before a loss occurs. In our case, sales revenue can drop by 331/3% before a loss occurs.

Q13 Under the equation approach, let Q be the sales volume of lunch boxes, ($20 0.6Q) + ($30 0.4Q) = $1,500,000 + ($8 0.6Q) + ($12 0.4Q) Q = 104,166.67
No. of local lunch boxes = 104,166.67 0.6 = 62,500 No. of continental lunch boxes = 104,166.67 0.4 = 41,666.67

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Under the weighted average approach, weighted average contribution = ($12 60%) + ($18 40%) = $14.4 Break-even sales volume = $1,500,000 $14.4 = 104,166.67 No. of local lunch boxes = 104,166.67 60% = 62,500 No. of continental lunch boxes = 104,166.67 40% = 41,666.67
Selling price Less Variable costs: Direct materials Direct labour Overheads Contribution margin Direct materials per unit (W1) Contribution per kg of direct materials (W2) Ranking Local lunch box $ 20 (3) (2) (3) 12 0.6 kg $20 1 Continental lunch box $ 30 (5) (4) (3) 18 1 kg $18 2

Q14 The ranking of the two products is as follows:

Workings: (W1) Local lunch box = $3 $5 = 0.6 kg Continental lunch box = $5 $5 = 1 kg (W2) Local lunch box = $12 0.6 = $20 Continental lunch box = $18 1 = $18 A schedule showing the production volumes based on rankings is as follows:
Product Local lunch box (W3) Continental lunch box (W3) Units produced 120,000 8,000 Direct materials 72,000 kg 8,000 kg 80,000 kg

Workings: (W3) Local lunch box = 120,000 0.6 kg = 72,000 kg Continental lunch box = 8,000 1 kg = 8,000 kg A contribution income statement is shown as follows:
Contribution Income Statement for the month
Local lunch box Continental lunch box Total contribution Less Fixed costs Net profit Contribution per unit $12 $18 Units produced 120,000 8,000 Total $ 1,440,000 144,000 1,584,000 (1,500,000) 84,000

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A1 A2

(a) Fixed cost (b) Variable cost (c) Fixed cost (d) Variable cost (e) Variable cost The ranking of the three products is as follows:
Selling price Less Variable costs: Direct materials Direct labour Overheads Contribution margin Direct labour hours per unit (W1) Contribution per direct labour hour (W2) Ranking Local lunch box $ 20 (3) (2) (3) 12 0.1 $120 1 Continental lunch box Hot dog $ $ 30 15 (5) (2) (4) (2) (3) (3) 18 8 0.2 $90 2 (W1) 0.1 (W2) $80 3

Workings: (W1) Hot dog = $2 $20 = 0.1 hours (W2) Hot dog = $8 0.1 = $80 A schedule showing the production volumes based on rankings is as follows:
Product Local lunch box Continental lunch box Hot dog (W3) Units produced 120,000 60,000 10,000 Direct labour hours 12,000 12,000 1,000 25,000

Workings: (W3) Direct labour hours = 10,000 0.1 hours = 1,000 hours Direct labour cost = 1,000 $20 = $20,000 A contribution income statement is shown as follows:
Contribution Income Statement for the month
Local lunch box Continental lunch box Hot dog Total contribution Less Fixed costs Net profit Contribution per unit $12 $18 $8 Units produced 120,000 60,000 10,000 Total $ 1,440,000 1,080,000 80,000 2,600,000 (1,500,000) 1,100,000

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ASSESSMENT

Application Problems
23.1

Unit contribution margin Required direct labour hours per unit Contribution margin per direct labour hour Ranking
Product Standard cabinet Luxury cabinet Units produced 6,500 6,000

Standard cabinet $50 2 $25 1

Direct labour hours 13,000 18,000 31,000

Luxury cabinet $57 3 $19 2

Expected total contribution margin = (6,500 $50) + (6,000 $57) = $667,000

23.2X
(a) Contribution margin per unit:
Per unit: Selling price Direct materials Direct labour Variable overheads Contribution margin Mini $ 25 (9) (5) (4) 7 Regular $ 43 (10) (15) (12) 6 Super $ 40 (9) (10) (8) 13

Super should be produced first as it has the highest contribution margin per unit. Mini $7 0.25 $28 Regular $6 0.75 $8 Super $13 0.5 $26

(b) Contribution margin per unit Direct labour hours per unit (W1) Contribution margin per direct labour hour (W2)

Workings: (W1) Mini = $5 $20 = 0.25 hours Regular = $15 $20 = 0.75 hours Super = $10 $20 = 0.5 hours (W2) Mini = $7 0.25 = $28 Regular = $6 0.75 = $8 Super = $13 0.5 = $26

If a limited number of direct labour hours are available, Mini should be produced as it has the highest contribution margin per direct labour hour.

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23.3
(a) (i)
Sales revenue Less Variable costs: Direct materials Direct labour Variable production overheads Variable selling and administrative overheads Contribution margin Total $ 2,500,000 (400,000) (600,000) (300,000) (150,000) 1,050,000 Per unit $ 100 (16) (24) (12) (6) 42

(ii) Contribution margin ratio = $42 $100 = 42% (iii) & (iv) Fixed costs:
Fixed production overheads Fixed selling and administrative overheads Total fixed costs $ 500,000 100,000 600,000

(b)

Break-even sales in units = $600,000 $42 = 14,286 units Break-even sales in dollars = 14,286 $100 = $1,428,600
Per Unit $ 100 (16) (24) (14.4 ) (6 ) 39.6

Sales revenue Less Variable costs: Direct materials Direct labour Variable production overheads ($12 120%) Variable selling and administrative overheads Contribution margin

Contribution margin ratio = $39.6 $100 = 39.6% Fixed costs:

Fixed production overheads Fixed selling and administrative overheads ($100,000 115%) Total fixed costs $ 500,000 115,000 615,000

Break-even sales in dollars = $615,000 39.6% = $1,553,030

23.4X
(a)

(b)

Contribution margin per machine hour for the floor cleaner: Contribution margin per unit ($10 $8) Required machine hours per unit (2,000 4,000) Contribution margin per machine hour Contribution margin per machine hour for the window cleaner: Contribution margin per unit ($7 $4) Required machine hours per unit (5,000 5,000) Contribution margin per machine hour

$2 0.5 $4 $3 1 $3

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As the floor cleaner has a higher contribution margin per machine hour than the window cleaner, the company should only produce floor cleaners to maximise profits. A total of 20,000 (10,000 0.5) units would be produced (assume that it can sell all the floor cleaner units produced). This would generate a contribution of $40,000 (20,000 $2) vs. a contribution of $30,000 from window cleaners (10,000 1 $3) if the machine hours are used to produce window cleaners.

23.5
(a)
Costs: Set-up Marketing Singer Band Chorus Dancers Security Miscellaneous Venue hiring charge Total costs $ 1,000,000 500,000 1,500,000 200,000 50,000 50,000 10,000 100,000 100,000 3,510,000

(b)

Weighted average price per ticket: [(1,000 $350) + (6,000 $550) + (4,000 $880)] 11,000 = $651.8182 Break-even sales in number of tickets: $3,510,000 $651.8182 = 5,384.9371 Ticket price $350 $550 $880 Break-even sales revenue 5,384.9371 $350 1,000 = $171,339
11,000 5,384.9371 $550 6,000 = $1,615,481 11,000 5,384.9371 $880 4,000 = $1,723,180 11,000
Income Statement
Sales revenue Less Costs: Set-up Marketing Singer Band Chorus Dancers Security Miscellaneous Venue hiring charge Net profit $ 1,000,000 500,000 1,500,000 200,000 50,000 50,000 10,000 100,000 100,000 $ 3,510,000

(3,510,000) 0

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(c)

Calculation of net profit:

Sales revenue (Workings) Less Costs: Set-up Marketing Singer Band Chorus Dancers Security Miscellaneous Venue hiring charge Net profit $ 1,000,000 500,000 1,500,000 200,000 50,000 50,000 10,000 100,000 100,000 $ 5,736,000 (3,510,000) 2,226,000

Workings:
Ticket price $350 $550 $880 Number of tickets sold 800 4,800 3,200 Revenue $ 280,000 2,640,000 2,816,000 5,736,000

23.6X
(a)

Contribution margin per unit Direct labour hours per unit (W1) Contribution per direct labour hour (W2) Ranking Number of units produced:
Local lunch box (W3) Continental lunch box (W3) Hot dog (W3)

Local Continental lunch box lunch box $12 $18

2 15 4 15

Hot dog $8
2 15

$90 1
Units produced 130,000 70,000 15,000 Direct labour hours 17,333 18,667 2,000 38,000

$67.5 2

$60 3

Profit:
Local lunch box Continental lunch box Hot dog Total contribution Less Fixed costs Net profit Contribution per unit $ 12 18 8 Units produced 130,000 70,000 15,000 Total $ 1,560,000 1,260,000 120,000 2,940,000 (1,500,000) 1,440,000

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(b)

Workings: (W1) Local lunch box = $2 $15 = 2 hours Continental lunch box = $4 $15 = 4 hours Hot dog = $2 $15 = 2 hours
15 15 15 15

(W2) Local lunch box = $12 2 = $90 Continental lunch box = $18 4 = $67.5 Hot dog = $8 2 = $60
15 15

(W3) Local lunch box = 130,000 2 hours = 17,333 hours Continental lunch box = 70,000 4 hours = 18,667 hours Hot dog = 15,000 2 hours = 2,000 hours
15 15 15

Limiting factors are inputs which limit the production of a product. Such factors can be raw materials, machine hours, labour hours or production capacity. When there is a limiting factor, management needs to decide what combination of production would maximise the profit with the limiting factor.

Past Exam Questions

23.7
(a) (i) Break-even point for the original estimates
Contribution Sales value $244,800 = $102,000 = $283,334 $680,000

(b)

= Fixed costs

(ii) Break-even point for the Managing Directors suggestion

Contribution Sales value $244,800 + ($185,000 $150,000) = ($102,000 + $30,000) = $320,801 $680,000

= Fixed costs

(iii) Break-even point for the Sales Directors suggestion = =

Fixed costs CM ratio

$102,000 + $49,200 = $420,000 0.36* Contribution $244,800 *CM ratio = = = 0.36 Sales value $680,000 Fixed costs + Target profit Unit contribution margin

Unit sales to attain the target profit of $234,600 = =

$102,000 + $234,600 = 27,500 square metres $12.24* $244,800 *Unit contribution margin = = $12.24 20,000

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23.8X
(a)

Contribution margin per unit = $50 ($15 + $7 + $13) = $15 Contribution margin ratio = $15 $50 100% = 30% Calculation of expected profit:
Total contribution ($15 80,000) Less Fixed costs ($6 80,000) Profit $ 1,200,000 (480,000) 720,000

(b)

Margin of safety (MOS) can be referred to as the amount by which sales revenue could fall from the current sales level to the break even point, where there is no profit or loss. MOS can be expressed in units of output, sales revenue or a percentage of sales. MOS = Sales revenue Break-even sales = ($50 80,000) ($480,000 30%) = $2,400,000

23.11
(a)
Sales Less Variable costs Contribution margin Less Fixed costs Net loss

Profit and Loss Account

(a) (b) (c) $ 1,720,000 (967,500) 752,500 (780,000) (27,500)

(b)

Contribution margin per unit (d) = (b) 21,500 Contribution margin ratio (e) = (b) (a) Break-even point (units) (c) (d) Break-even point (sales) (c) (e) (i)
Revised Profit and Loss Account

$35 43.75% 22,286 units $1,782,857 Alternative answer: $1,782,880

Sales (a1) Less Variable costs {[($967,500 21,500) $10] 21,500} Contribution margin (b1) Less Fixed costs ($780,000 + $184,000) (c1) Net profit

$ 1,720,000 (752,500) 967,500 (964,000) 3,500

(c)

Contribution margin per unit Contribution margin ratio Break-even point

(d1) = (b1) 21,500 (b1) (a1) (c1) (d1)

$45 56.25% 21,423 units

(ii)  It is advisable to automate the operations as the operating result of the company will turn from a loss of $27,500 to a profit of $3,500, and the break-even point is lower.
Revised Profit and Loss Account
Sales [($80 90%) 21,500 2] Less Variable costs ($45 per unit) Contribution margin Less Fixed costs ($780,000 + $120,000) Net profit $ 3,096,000 (1,935,000) 1,161,000 (900,000) 261,000

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(d)

Assumptions of cost-volume-profit analysis Costs are either fixed or variable. Impact on costs and revenue is entirely due to volume of production. Costs and revenue patterns are linear over levels of output being considered. Fixed cost remains constant and variable cost varies in proportion to volume. Sales mix is constant or only one product is manufactured. Other acceptable answers. (Any three answers with explanation)

23.12X
(a) Units to be sold = $4,800,000 $120 = 40,000 units Variable costs:
Direct materials Direct labour Production overhead: Variable Non-production overhead: Variable Total $000 1,200 600 520 480 2,800 Per unit $ 30 15 13 12 70

(b)

Contribution margin per unit = $120 $70 = $50 Break-even point in units = ($780,000 + $620,000) $50 = 28,000 units Margin of safety = (40,000 28,000) 40,000 100% = 30% The margin of safety measures the difference between the budgeted level of sales and the break-even sales. It is used as a measure of risk, the larger the ratio, the safer is the situation since there is a lower probability of reaching the break-even point. A margin of safety of 30% means that losses begin if the sales revenues of the company drop by more than 30%. Selling price = $120 95% = $114 Revised contribution margin per unit = $114 $70 = $44 Sales volume = 40,000 units 80% = 50,000 units
Total contribution ($44 50,000) Fixed overheads ($780,000 + $620,000 + $50,000) Net profit $000 2,200 (1,450) 750

(c)

(d)

The proposal from the marketing director is worth proceeding with since it can increase the companys net profit by $150,000 to $750,000. Required contribution:
Fixed costs ($780,000 + $620,000) Target profit Revised sales volume (40,000 units 110%) Revised contribution margin per unit: $2,200,000 44,000 Add Revised variable costs per unit [($30 95%) + $15 + $13 + $12] Revised selling price per unit $000 1,400 800 2,200 44,000 $ 50.0 68.5 118.5

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23.13
(a)
Product (per unit) Selling price Less Variable costs: Direct materials Direct labour Overheads Total variable costs (i) Contribution (ii) Direct labour hours required per unit Contribution per direct labour hour (i) (ii) Ranking Direct labour hours needed 20,000 4 = 80,000 16,000 7 = 112,000 15,000 2.8 = 42,000 234,000 X $816 $750 $66 (W1) 2.8 $23.57 3 Direct labour hours needed 16,000 7 = 112,000 20,000 4 = 80,000 15,000 2.8 = 42,000 234,000 X $960 $438 $98 $214 $750 $210 (W1) 2.8 $75 3 Y $1,080 $156 $245 $63 $464 $616 (W2) 7 $88 2 $ 7,200,000 9,856,000 3,150,000 20,206,000 (2,350,000) 17,856,000 Y $918 $464 $454 (W2) 7 $64.86 1 $ 7,264,000 4,560,000 990,000 12,814,000 (2,350,000) 10,464,000 Z $748 $520 $228 (W3) 4 $57 2 Z $880 $254 $140 $126 $520 $360 (W3) 4 $90 1

Contribution Z (20,000 $360) Y (16,000 $616) X (15,000 $210) Total contribution Less Fixed costs Net profit

(b)

Product (per unit) Revised selling price Total variable costs (i) Contribution (ii) Direct labour hours required per unit Contribution per direct labour hour (i) (ii) Ranking

Contribution Y (16,000 $454) Z (20,000 $228) X (15,000 $66) Total contribution Less Fixed costs Net profit

Workings: (W1) $98 $35 = 2.8 (W2) $245 $35 = 7 (W3) $140 $35 = 4

23.14X
(a) Budgeted sales units for Bee: Budgeted sales units for Cee:

$900,000 2 = 3,600 units ($150 2) + ($200 1) $900,000 1 = 1,800 units ($150 2) + ($200 1)
Bee $ 36,000 72,000 108,000 Cee $ 27,000 36,000 63,000 Total $ 63,000 108,000 171,000

Fixed costs: Production ($10 3,600; $15 1,800) Selling ($20 3,600; $20 1,800)

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(b)

Contribution margin in percentage:

Per unit: Direct materials ($2 per kg) Direct labour ($10 per hour) Production overheads: Variable Selling overheads: Variable Total costs Selling price Contribution margin Contribution margin in percentage ($60 150; $51 200) Bee $ 30 40 5 15 90 150 60 40% Cee $ 10 80 18 41 149 200 51 25.5%

(c)

Break-even units for Bee = Break-even units for Cee =

$171,000 2 = 2,000 units ($60 2) + ($51 1) $171,000 1 = 1,000 units ($60 2) + ($51 1)

Contribution margin per unit of limiting factor (direct materials)

Per unit: Contribution margin Direct materials in kg ($30 2; $10 $2) Contribution per kg of direct materials Bee $60 15 $4 Cee $51 5 $10.2

(d)

The company should produce Cee because it generates a higher contribution per unit of limiting factor (direct materials). Fixed costs are those costs incurred for a particular period of time and tend to remain the same irrespective of the production volume within a relevant range of output. Examples of fixed costs for a shoes manufacturer are rent for the factory, insurance for plant and depreciation for machinery calculated on time basis. (Any two examples) Unit fixed costs will increase as a result of decrease in production volume and will decrease as a result of increase in production volume.

23.15
(a)

Profitability ranking:
Selling price per unit Less Variable costs: Direct materials Direct labour Variable overheads Total variable costs per unit Contribution per unit Direct labour hours per unit Contribution per labour hour Production priority X $ 320 60 80 90 230 90 2 $45 2 Labour hours Product 10,100 (2,800) Z (4,000) X 3,300 Y Y $ 300 75 60 120 255 45 1.5 $30 3 Units produced 2,800 2,000 2,200 (3,300 1.5) Z $ 280 80 40 100 220 60 1 $60 1

Optimum production plan:

Total available labour hours Less Z (1 2,800 units) X (2 2,000 units) Labour hours available for Y

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(b)

Profit statement using marginal costing format under the optimum production plan:
Contribution per unit Sales (in units) Contribution Fixed overhead costs (W1) Net profit X $ 90 2,000 180,000 Y $ 45 2,200 99,000 Z $ 60 2,800 168,000 Total $

447,000 (226,000) 221,000

(c)

Workings: (W1) ($20 2 2,000) + ($20 1.5 3,000) + ($20 1 2,800) A limiting factor is a factor that prevents a company from achieving higher levels of performance in a management accounting decision. The limited resources have to be utilised as effectively as possible to gain maximum benefits. A limiting factor could be a companys resources including raw materials, labour, production capacity, etc., or could be the sales demand.

23.16X
(a) Estimated annual profit for the coming year:
Sales ($24,000,000 80% 95%) Less Variable cost of sales: Direct materials ($8,000,000 80% 95%) Direct labour ($6,000,000 80%) Production overheads ($2,000,000 80%) Selling overheads ($800,000 80%) Contribution Less Fixed costs: Production overheads Selling overheads ($1,700,000 + $300,000) Net profit $000 9,500 7,500 2,500 1,000 1,000 2,000 $000 28,500

(20,500) 8,000

(3,000) 5,000

(b)

Break-even point and margin of safety: Unit selling price Units sold/to be sold Unit contribution Fixed costs Break-even point in units Break-even sales revenue Margin of safety ratio Current year $24,000,000 80,000 = $300 80,000 units $7,200,000 80,000 = $90 $2,700,000 $2,700,000 $90 = 30,000 units 30,000 $300 = $9,000,000 [(80,000 30,000) 80,000] 100% = 62.5% Coming year $300 95% = $285 80,000 80% = 100,000 units $8,000,000 100,000 = $80 $3,000,000 $3,000,000 $80 = 37,500 units 37,500 $285 = $10,687,500 [(100,000 37,500) 100,000] 100% = 62.5%

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(c)

The proposed changes are worthwhile because the annual profit for the coming year will be higher. Even if the break-even point increases from 30,000 to 37,500 units, the margin of safety ratio would remain unchanged at 62.5% for the two years, which means that the risk of making a loss would be the same for both years. The revised unit selling price:
Variable costs Fixed costs Target profit Required sales revenue Units to be sold Unit selling price $000 20,500 3,000 6,000 29,500 100,000 $295

(d)

23.17X
(a) Kg sold = $2,000,000 $80 = 25,000 kg
Variable costs: Direct materials Direct labour Production overheads: Variable Non-production costs: Variable Total $000 500 100 120 180 900 Per kg $ 20.0 4.0 4.8 7.2 36.0

(b)

Contribution margin per kg = $80 $36 = $44 Break-even point in kg = ($508,000 + $152,000) $44 = 15,000 kg Break-even sales = $80 15,000 = $1,200,000 Margin of safety (in kg) = 25,000 kg 15,000 kg = 10,000 kg The margin of safety (MOS) measures the difference between the actual or budgeted level of sales and the break-even sales. It can be measured in dollar sales, in units or in percentage. It is used as a measure of risk, the higher the MOS, the safer is the situation since there is a lower probability of falling below the break-even point. A margin of safety of 10,000 kg means that losses begin if the sales in kg drop by more than 10,000 kg, i.e., 40% from actual level. Revised unit selling price = $70 Revised unit variable cost = $36 ($20 10%) = $34 Revised contribution per kg = $70 $34 = $36 Required contribution to earn a profit of $500,000:
Net profit Fixed overheads [$508,000 ($508,000 60% 20%) + $152,000] $ 500,000 599,040 1,099,040

(c)

Required sales volume to earn a profit of $500,000: $1,099,040 $36 = 30,528.9 kg or 30,529 kg

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(d)

Production fixed costs of a manufacturing company are those production costs incurred for a particular period of time and tend to remain the same irrespective of changes in the level of activity (for example, production volume) within a relevant range of activity. Examples of production fixed costs are factory rent, rates and depreciation of machinery calculated on a time basis (straight line basis or reducing balance basis). Production variable costs are production costs which tend to vary with the changes in the level of activity (for example, production volume). Examples of production variable costs are raw materials, direct labour and depreciation of machinery calculated on machine hours or production unit basis.

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