COST – VOLUME – PROFIT ANALYSIS (CVPA)

Illustration 1
The following figures relate to Etuno Nigeria Limited that manufactures a range of products:
YR TOTAL SALES TOTAL COST
1 39,000 34,800
2 43,000 37,600

You are required to:

Assuming stability in prices with variable costs, controlled to reflect pre-determined relationships
and an unvarying figure for fixed cost calculate:
i. Fixed cost
ii. Profit/volume ratio
iii. The breakeven point
iv. Margin of safety for year 1 and 2

Solution to illustration 1
ETUNO NIGERIA LIMITED
i. Fixed cost = Total cost – Total variable cost
N37,600 – 0.7(43.000)
= N37,600 – N30,100
N7,500

Working
Calculation of variable cost per unit using high and low method

Year Sales Cost

N N
2 43,000 37,600
1 39,000 34,800
Difference 4,000 2,800
 Variable cost per unit = N2800 = 0.70
N4,000
1 profit volume ratio

Yr. 1 = Total sales – Total variable cost

Total sales
= N39, 000 – N39,000 (0.7)
N39, 000
= 11,700 = 0.3
N39, 000

Yr. 2 43,000 – N43, 000 (0.7) = N12, 900

N43, 000 N43,000
= 0.3
1 BEP (sales) = Total fixed cost TFC
Contribution margin ratio CMR
= N7, 500 = N25, 000
0.3
2 Margin of safety
Year 1 Year 2
Budgeted sales N39, 000 43,000
Less
BEP (sales) 25,000 25,000
N14, 000 N18,000
Question 1

Doing-well Venture summary of projected income statement for the coming financial year is as
follows:
N
Sales revenue 80,000
Less variable costs 20,000
Contribution margin 60,000
 Less total fixed costs 15,000
Profit before tax 45,000
Less taxation (40%) 18,000
Profit after tax 27,000

The company is expecting to sells its product at N20 per unit.

Required:
i. What is the company’s contribution margin and contribution margin ratio?
ii. What is the break-even point in sales value and sales units?
iii. What is the sales value and units that will enable the company to earn a pre-tax profit
of N60, 000?
iv. Determine the sales revenue and units necessary to generate an after tax profit of N45,
000.
v. Assume actual sales of N90, 000, what is the company’s margin of safety in value and
in units.

Question 2

Warm-up Nigeria Ltd manufactures and sells a unique product the selling price of which is
N20.00.The summarized profit loss statement for last year is as follows:
N N
Sales 800,000
Costs
Direct materials 120,000
Direct wages 160,000
Variable production overhead 80,000
Fixed production overhead 100,000
Administration overhead 75,000
Selling and distribution overhead 60,000 595,000
Net profit before tax 205,000
Less provision for taxation (40%) 82,000
Net profit after tax 123,000

Required
i. Calculate the break-even point for last year.
ii. What do you understand by the terms profit volume ratio and margin of safety?
Illustrate using last year’s results.
iii. Determine the number of units to sell in the current year to achieve an after-tax profit
of N150,000.00
iv. Calculate the sales value required to achieve a net profit before tax of 15% of total
revenue.
v. Assuming no change in unit selling price and cost structure, calculate the percentage
increase in sales volume required in the current year to produce a profit before tax 20%
higher than last year’s results.
 vi. Calculate the selling price per unit that the company must charge in the current year to
cover a potential increase of 12% in variable cost this current year and still maintain
last year’s contribution margin ratio.
vii. Determine the volume of sales in value the company must achieve in the current year
to maintain the same net profit of last year if the selling price remains at N20 and
variable cost per unit increases by 12%.
viii. Recalculate last year’s results if salesmen commission of 10%is introduced, selling
price is reduced by 13%and volume increases by 30%.
ix. What are the underlying assumptions of break-even analysis?
Question 3

Max Company produces a single product that it sells wholesales for N100 per unit. Variable costs
per unit amount to N80 and the total fixed costs are N100, 000. Assume the applicable tax rate is
40%.

Required:
i. Find the break-even point in sales value.
ii. Find the sales value to generate N20, 000 in net income before tax.
iii. Find the sales value to generate N24,000 in net income after tax
iv. Find the sales value to generate a 9% return on sales value after tax
v. Find the sales value to generate an 18% return on sales before tax.

Question 4

Three companies make a similar product and sell it in the same market. The three companies
charge the same selling price of N50 each for the product.
The budgeted costs of the three companies are as follows:

Company Variable costs Fixed costs per

Per unit (N) annum (N’000)
X Limited 20 600
Y Limited 25 450
Z Limited 30 300
You are to assume that production and sales quantities are equal and are required using the
information given above to calculate for each of the companies X. Y and Z Limited for the year.
i. The quantities to be sold are each company when sales value and costs are equal.
ii. The quantities to be sold by each company when each makes a profit of
N360, 000.

Question 5

a. Cost/volume/profit (CVP) analysis is a technique available to management to understand

better the inter-relationship of several factors which affect a firm’s profit. As with much such
technique the accountant over simplifies the real world by making certain assumptions. Mention
five major assumptions underlying CVP analysis

b. Bisi Toys Company’s tentative budget for product H for 1987 is as follows:
Sale (2,500) at N40 per unit N100, 000
Manufacturing cost of goods sold:
Labor direct 15,000
Direct materials used 14,000
Variable factory overhead 10,000
Fixed factory overhead 5,000 44,000
Gross profit 56,000
Selling expenses
Variable 6,000
Fixed 10,000
Administration expenses
Variable 5,000
Fixed 10,000 31,000
Net Profit 25,000

Required:
i. How many units of product H would have to be sold to break-even?
ii. What would the operating income be if projected sales increased by 30%.

Question 6

Breakfast Limited retails two products: Shirts and Knickers. The budgeted income statement for
the year 2015 is as follows:
SHIRT KNICKER TOTAL
Units sold 300,000 100,000 400,000
N N N
Revenue at N200 and N300 per unit 60,000,000 30,000,000 90,000,000
Variable costs at N140 and N180 per unit 42,000,000 18,000,000 60,000,000

Contribution margins at N60 and N120 18,000,000 12,000,000 30,000,000

per unit

Fixed costs: 12,000,000

Operating profit 18,000,000

Required:

a. Calculate the break-even units, assuming that the planned revenue mix is maintained.
b. Determine the break-even point in units if only shirts are sold and if only knickers are sold.
c. Calculate the budgeted operating profit and break-even point if 200,000 units are sold but
only 20,000 are knickers ( ICAN NOV DIET 2014).

Question 7

Feed-well Limited is the manufacturer and distributor of a new wonder drug designed to relieve
tension and reduce inhibitions. The company’s market consists principally of people connected
with the entertainment industry on the west coast of Africa.

The company prices the drug at full cost plus 100%. The current variable costs of production are
as follows:
Ingredient ‘X’ : 8mgs @ N10 per mg
Labour : 5 minutes @ N80 per hour
Ampoules: 1 @ N1.50 per ampoule
The company’s fixed costs (which include the cost of distribution) are currently N320,000 per
annum and are absorbed on the basis of budgeted production for the year.
The company is currently setting the price of the drug for the coming year and wishes to take into
account expected price increases attached to the various elements of cost.

They are as follows:

Element of cost Expected price increase
Ingredients ‘X’ 10%
Labour rate 50%
Ampoules 331/3%
Fixed costs 12½%

The budgeted figure of the company’s production and sales for the coming year is 9,000 units of
wonder drugs. Having received the projected profit figure for the coming year, the chairman has
asked the market protection unit to help in producing a more sophisticated approach to pricing.
The unit has investigated the market and believes that, with some influence being exercised on
clients, the following demand pattern will emerge:

Selling price Demand

N Units
200 17,000
220 16,000
240 15,000
260 11,000
280 9,000
300 7,000

You are required to calculate:

a. The selling price of the drug for the coming year on the company’s usual basis
b. The company’s profit at the budgeted level of activity
c. The break-even point in units and sales value
d. The profit/volume ratio
e. The maximum amount that the company should be prepared to spend on advertising to
increase sales to 10,000 units
f. The optimal selling price and production level (with supporting calculations) assuming that
the demand pattern shown above is accurate
g. The additional profit (if any) compared to the selling price calculated in (a.) above.

6.11. ANSWERS TO END OF CHAPTER REVIEW QUESTIONS

Solution to theory question 1

DOING WELL VENTURE

(i) Calculation of contribution margin and contribution margin ratio:.

Contribution margin
N
Sales revenue 80,000
Variable costs 20,000
Contribution margin 60,000

Sales:. Unit = 80,000 = 40

N20
CMR = contribution = 15 = 0.75
Selling price 20 = 75%
(ii) Break even profit = fixed cost
Contribution
15,000 x N20
= N20, 000
B.E.P in units = fixed cost
Contribution/unit
= 15000 = 1000 units
15
(iii) Sales in value to earn a desired profit fixed + pre-tax
Contribution/unit
= 15,000 + 60,000 x 20
15

75,000 x 20
15
= N100, 000
Sales in units to earn = fixed cost = 60,000
Contribution unit
= 750,000 = 5,000 units
15
(iv) Sales to achieve an after tax profit N45, 000
= fixed cost + desired profit x
Contribution/unit
= 15,000 + 45,000 x 20
15 0.6
= N220, 000
(v) Margin of safety = sales – BEP sales in units
In units
= 45000 – 1000
= 3500
MOS in: N90, 000 – N20, 000 = N70, 000

Solution to theory question 2

WARM UP NIGERIA LTD

(i) Calculation of breakeven point for last years

B.E.P (in units) = fixed cost
Contribution/unit
Workings

Fixed cost
Production overhead = 100,000
Administration overhead = 74,000
Selling and distribution OHD = 60,000
235,000
Contribution/unit
Selling price 20.00
Variable cost unit 9.00
11,00

Variable cost N
Direct materials 120,000
Direct wages 160,000
Variable product 80,000
360,000

Units sold = 800,000 = 40,000 units

20

:. Variable cost/unit = 360,000 = N9

 40,000

:. B.E.P (in units) = 235,000

11
= 21363.64 units

B.E.P (in sales value) = fixed cost x Selling price

Contribution/unit
= 21,363.64 x N20
= N427, 272.80

(ii) The term profit volume ratio, written on profit ratio means the same thing as
contribution margin ratio or contribution values ratio i.e. P/V = CMR = C/S and it
represents the amount of contribution derived from a specific amount of sales.
It may be expressed as a ratio or a %
Margin safety is the difference between budgeted sales volume and break even sales
volume. It represent the vulnerability of a business to a full in demanded. It is
usually expressed as a % of budgeted sales.
MOS = budgeted sales – BEP sales
Budgeted sales
From last year data:
CMR = C/S = P/VS
CMR (in unit) = selling price – variable cost
Selling price
= 20 – 9 = 11 = 0.55
20 20
I.e. 55%

(MR (in sales value0 = total sale – Total Vc

Total sale
= 800,000 – 360,000
800,000
= 0.55 = 55%

What this means is that 55% of every one naira sales is represented in contribution
Similarly margin of safety (MOS)
MOS (in units) = sales in unit – BEP print in unit
= 40,000 – 21,363
= 18,637

In% = sales in units – BEP in units = 18,637

Sales in units 40,000
= 46.59%
MOS is sales value = sales in naira – BCP in naira
= 800,000 – 427,273
= N372, 727
In % = 372,727 = 46.59%
800, 000

It represents the vulnerability of the business of warm up Nigeria Ltd to a falling demand
iii. Calculation of sales in units to achieve profit after tax of N150, 000
Sales in units = fixed cost = desired profit
Contribution/unit
= 235,000 + 150,000
11
= 44,091 units

(vi) Sales in naira = fixed cost + desired profit x selling price

Achieve a net profit contribution/unit
Before tax of 15% total, revenue
= 235,000 + 120,000 x 2o
11
= N645, 455
(v) Sales in units required in current year to produce a profit before 20% higher than last year’s
results
Sales in unit = fixed cost x desired profit
Contribution per unit
= 235,000 + 246,000
11
= 43,727
% increase in sales unit = 43,727 – 40,000 x 100u
40,000
= 9.32%
(vi) Selling price per unit to achieve 12% increase in variable cost to maintain CMR of 55%
CMR = SP – VC
SP
0.55 = sp – 1.12 (N9)
SP
0.55 SP = SP – 10.08
0.55 SP – SP = - 10.08
:. SP = 10.08 = N22.40
0.45
(vii) Calculation of sales in value to maintain last year’s net profit with selling price remaining
N20 with an increase of 2% in variable cost .

Sales in N = Fixed cost + desired profit xx selling price

Contribution/unit
= 235,000 + 205,000 x 20
20 – 1.12 (9)
= 440, 000 x 20
9.92
= N887, 096.77
(viii) Calculation of last year’s result incorporating the changed provided
N N
Sales (52,000 x 17.4) 904,800
Sales (520,000 x 17.40

Costs:.
Direct materials (52,000 x 120,000) 156,000
Direct wages (52, 000 x 120,000) 208,000
Variable production (52,000 x 8000) 104,000
Fixed production 100,000
Admin OHD 75,000
Selling & dist OHD 605,000
Selling commission (0.1 x 904800) 90,480 793,400
Net profit before tax 111,320
Less provision for taxation @ 40% (44,528)
Net profit after tax 66,792

Solution to theory question 3

MAX COMPANY

(i) Breakeven point = fixed cost x selling price

In sales value contribution/unit
= 100,000 x 100
20
= N500, 000
(ii) Sales in N to achieve = fixed cost + net income x SP
a desired net income before contribution/unit
= 100,000 + 20,000 x 100
20
= N600, 000
iii. Sale in N to generate = Fixed cost + net income(1-tax rate) x selling price
N24, 000 net income after tax contribution/unit
= 100,000 + 24000 (0.06)x 100
20
= N700, 000

iv. Sales in N to achieve a desired profit after tax of organization value

(fixed cost + 0.09 x 0.6)
20
X = (100,000 + 0.15x) 100
20
X = 10,000,000 + 15 x
20
20x = 10,000,000 + 15x
5x = 10,000,000
X = 10,000,000 = 2,000,000
5

(v) Sales in N to generate = fixed cost + 0.18x*100

An 18% return on sales before tax 20
X = 100,000 + 18k
20
20X = 10,000,000 + 18 x
2x = 10,000,000
X = 10,000,000 = 5,000,000
2

Solution to theory question 4

(i) Calculation of breakeven point in units of the three companies

Company X Y Z
Fixed cost(i) N600,000 N45,000 N300,000
N N N
Selling price 50 50 50
Variable cost 20 25 30
Contribution/unit 30 25 20
Breakeven point 600,000 450,000 300,000
In units (i/ii) 30 25 20
= 20,000 13,000 15,000

ii. Calculation of sales to make a profit of N360,000

fixed cost = desired profits
Contribution/unit
X = 600,000 + 360,000 = 32,000 units
30
Y = 450,000 + 360,000 = 32,400 units
25
Z = 360,000 + 360,000 = 33,000 units
20

Solution to theory question 5

5a. Refer to the assumptions of CVP analysis

5b. BISI BOY TOYS COMPANY

Calculation of units of product H to be sold to break even

= fixed cost (vi)
Contribution/unit
 = 25,000 = 1,250 units
20
(vi) Fixed cost N
Manufacturing: fixed factory overhead 5,000
Selling expenses 10,000
Administration expenses 10,000
25,000

(vii) Sales N N
100,000
Variable costs 39,000
Manufacturing -
selling expenses 6,000
Administration expenses 5,000
(50,000)
Contribution 50,000
Contribution/unit = 50,000 = N20
2,500
5bii. Calculation of operating income with sales increasing by 30%
N N
Sales (3,250 x 40) 130,000
Manufacturing costs of gross
Labor direct (N6 x 3,250) 19,500
Directs materials (N5.0 x 3250) 18,200
Variable factory OHD (N4 x 3250) 13,000
Fixed factory 0verhead 5,000
(55,700)
Gross profit 74,300
Selling expenses
Variable (2.4 x 3,250) 7,800
Fixed 10,000
Administrative expenses
Variables (2 x 3250) 6,500
Fixed 10,000 (34.300)
Net profit
40,000
Solution to question 6

Breakfast Limited

Total contribution = N30,000,000

Total Revenue = N90,000,000

Therefore contribution/sales ratio (c/s)

 = 30,000,000 = 1
90,000,000 3 or 0.3333

BEP (N) = Fixed cost = N12,000,000 = N36,000,000

c/s 0.3333

For Shirts

BEP (N) = N60,000,000 X N36,000,000 = N24,000,0000

N90,000,000

Dividing by units sales price

= N24,000,000
200 = 120,000 units

For Knickers

BEP(N) = N30,000,000 X N36,000,000

N90,000,000 = N12,000,000

Dividing by unit sales price

= N12,000,000
N300 = 40,000 units

Total = Shirts + Knickers

= 120,000 + 40,000 = 160,000 units

a. Unit contribution margins are:

Shirts : N200 – N140 = N60
Knickers : N300 – N180 = N120

If only Shirts were sold,the break-even point would be:

N12,000,000
N60
= 200,000 units

If only Knickers were sold, the break-even point would be :

N12,000,000
N120
= 100,000 units

b. i. Budgeted Operating Profit

 Shirts Knickers Total
Units sold 180,000 20,000 200,000
N N N
Sales (N200 X 180,000) 36,000,000 6,000,000 42,000,000
( N300 X 20,000)
Variable costs (180,000 X 140) 25,200,000 3,600,000 28,800,000
(20,000 X 180)
Contribution 10,800,000 2,400,000 13,200,000
Less: Fixed cost 12,000,000
Operating profit 1,200,000

ii. C/S Ratio = N13,200,000 = 0.3331428

N42,000,000

BEP(N) = Fixed cost = N12,000,000 = N38,182,512

C/S Ratio 0.31428
N38,182,512 = N38,182,512 = N38,182,512 = N5,454,645
Sales Ratio 6 7
Knickers = N5,454,645 X 1 = 5,454,645
Shirts = N5,454,645 X 6 = 32,727,867
38,182,512

BEP( units) Knickers = N5,454,645 = 18,182 units of Knickers

N300

Shirts = N32,727,867 = 163,639 units of shirts

N200

Total = 181,648 units

Solution to question 7

a. Calculation of selling price

N
Ingredient ‘X’ 8 milligrams @ N10 per milligram 88.00
Labour: 5 minutes @ N120 per hour 10.00
Ampoules 1 mg @ N2 per ampoule 2.00
Fixed costs: N320,000 (1.125)÷ 9,000 units 40.00
Total cost 140.00
Profit margin 100% 140.00
Selling price 280.00
b. Profit at budgeted level of activity =9,000 units @ N140 per unit =N1,260,000
c.
d. Break-even point in units = Fixed costs = N320,000(1.125) = 2,000 units
Contribution/unit N(280 – 100)

In sales value,
Break-even point in unit X selling price = 2,000 X N280 = N560,000

e. Profit volume ratio

P/V ratio = Contribution = N180 = 64.3%
Selling price N280

f. Maximum expenditure on advertising to increase sales to 10,000 units of wonder drug.

The maximum amount the company should be prepared to spend is equal to the
additional contribution that they would earn.
1,000 units @ N180 = N180,000

g. Optimal selling price and production level

Selling Variable Contribution Demand Total contribution
Price Cost per unit
N N N Units N
200 100 100 17,000 1,700,000
220 100 120 16,000 1,920,000
240 100 140 15,000 2,100,000
260 100 160 11,000 1,760,000
280 100 180 9,000 1,620,000
300 100 200 7,000 1,400,000
The optimal selling price is N240 and the optimal production level is 15,000 units

h. Additional profit compared to selling price of N280 =

N2,100,000 – N1,620,000= N480,000