QU #2 Carico has the capacity to manufacture 50,000 units annually of its only p

Question

QU #2 Carico has the capacity to manufacture 50,000 units annually of its only product. The following information is available: Selling price - Variable manufacturing costs Fixed manufacturing costs$180,000 annually Fixed marketing and administrative costs Variable marketing and administrative costs S26 per unit per unit $120,000 annually per unit Required a) Calculate breakeven point in units. (5 marks) b)Compute the quantity of units which need to be sold to earn a target annual profit of $120,0000 5 marks) c) In an attempt to achieve better results in the marketplace, management has been looking at changing the reward system for marketing, distribution and sales personnel an increase in variable marketing and administrative costs by $2 per unit, and would reduce fixed marketing and distribution costs by $50,000 i)Calculate the number of units required to breakeven if management implemented the changes(5 marks) ii) Would you suggest that management pursue the changes? Explain(5 marks) d) Cost volume profit analysis is more relevant to small enterprises than it is to large enterprises. Discuss this statement CLEARLY stating whether you agree or disagree and why.(5 Marks) . This would result in

Explanation / Answer

a) Selling Price/ Unit = $26

Less: Variable Manufacturing Cost / Unit = $12

Less: Variable Marketing & Administratice Cost / Unit = $4

Therefore, Contribution / Unit = $10

Break Even Point (BEP) = Total Fixed Cost / Contribution per Unit

Total Fixed Cost = Fixed Manufacturing Cost + Fixed Marketing & Administratice Cost = $1,80,000 + $1,20,000 = $3,00,000

So, BEP (in units) = $3,00,000 / $10 = 30,000

b) Targeted annual profit = $1,20,000

So, number of units to be sold to achive the targeted profit = (Fixed Cost + Target Profit) / Contribution per Unit = ($3,00,000 + $1,20,000) / $10 = $4,20,000 / $10 = 42,000

c) i) BEP in revised scenario = Revised Total Fixed Cost / Revised Contribution per Unit = ($3,00,000 - $50,000) / ($10 - $2) = $2,50,000 / $8 = 31,250 units

ii) Initially, BEP was 30,000 units which has been increased to 31,250 now. This meands that the business may need to earn more revenue to sustain as the benchmark level for "no profit, no loss" situation has incresed by 1,250 units. hence, it is not recommended to pursue the changes by the management.

d) Cost Volume Profit (CVP) analysis is an analytical tool that helps the management of a company to identify the contribution margin and thus assess the BEP of the business. Since the contribution is used to absorb fixed cost and the remaining balance of contribution is treated as profit, it become critical for the management to calculate the contribution margin and compare the same with the fixed cost of the firms to evaluate the earning capacity and profitability position of the business. Hence, CVP is useful for any business that runs on profit motive. In other words, CVP may be considered valuable irrespective of the size of business, whether small or big.

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