MANAGEMENT ACCOUNTING
Topic: Break
– Even – Analysis
For:
Questions and answers, email: theotherwomaninmarriage@gmail.com
This one is from Past Questions:
ILLUSTRATION:
Dangote Plc is planning its
production for next year. The accountant
has given the following data for the current period:
PRODUCT
|
|
Wafer
|
Indomie
|
Cracker
|
Nut
|
|
Sales (Carton)
|
25
|
20
|
30
|
25
|
|
Selling Price Per Carton
|
1,500
|
1,250
|
1,600
|
1,400
|
|
Variable Cost Per Carton:
Direct material:
Direct labour:
Direct expenses:
Variable Overhead
|
30
15
25
400
|
25
20
15
450
|
45
30
20
500
|
40
25
25
570
|
Fixed Overhead per annum is
N54,000.
Required:
Calculate the following:
a.
The contribution to sales ratio
b.
The break-even-point in value of sales
c.
The profit at the total sales value
d.
The margin of safety at the total sales value in C.
e.
The break-even-point in value of sales if the sales
value increase by 40%.
SOLUTION:
DANGOTE PLC
a.
Computation of contribution sales ratio
Contribution
to sales ratio = contribution
Sales
1,500 – 470
= N1, 030
Contribution
to sales = N1030
N1500
CMR = 0.69
Explanation:
Wafer =
N1,500 – N470 (i.e 30 + 15+25+400 = N470).
This N470 is gotten from the column of Wafer. That is the variable which
is N470 minus the selling price which is N1,500 will give us N1030. Then divide
N1030 by the selling price of N1500 you will give 0.69. That is how we got the
0.69 above.
Now we
compute for Indomie column. The same way ok.
Indomie:
N1250-510 =
N740.
CMR = N740
N510
CMR = 0.59
For
Cracker:
N1,600 –
N595=N1005
CMR = N1005
N1600
CMR = 0.63
For: Nuts:
N1400 –
N660=N740
CMR = N740
N1400
CMR = 0.53
Now: the
Total CMR = 1030+740+1005+740
1500+1250+1600+1400
We all know how we got
the above and figure? The top figures 1030+740+1005+740 are from the CMR, just
look at our solving steps while the one below it 1500+1250+1600+1400 are from
the selling price each. When you add them together, this is what you get below:
= N3,515
N5,750
The Total
CMR is = 0.61
But there
is another way to solving this (a) part of this question. Let’s look at it
below:
First, we
start with the table:
PRODUCT
|
|
Wafer
|
Indomie
|
Cracker
|
Nut
|
Total
|
|
Sales (Carton)
|
25
|
20
|
30
|
25
|
|
|
Selling Price Per
Carton
|
1,500
|
1,250
|
1,600
|
1,400
|
|
|
Sales Revenue:
|
37,500
|
25,000
|
48,000
|
35,000
|
145,500
|
|
Variable Cost Per Carton:
Direct material:
Direct labour:
Direct expenses:
Variable
Overhead
|
750
375
625
10,000
|
500
400
300
9000
|
1350
900
600
16,000
|
1000
625
625
14,250
|
3,600
2,300
2,150
48,250
|
|
Variable Overhead Total
|
|
|
|
|
56,300
|
How did we
get the sales revenue figures? 1, 500 x 25=37,500 that is for Wafer. Indomie will be 1250 x 20 = 25,000 etc. Then we have the total of all the sales
revenue to be 145,500.
Then for
direct material, labour, expenses and variable overhead, look at the original
table figures and multiply then with by sales carton figures i.e. direct material
30 x 25=750. Direct labour figure 15 x 25 will give you 375 etc.
To get our
same contribution, we minus Total Sales revenue from Variable Overhead Total
i.e. 145,500 – 56,300 =89,200.
Remember we
have fixed cost of 54,000.
To compute
the CMR, we have to do something like this;
CMR= Total Fixed Cost
Total Contribution
= 54,000
89,200
=0.61
Which is
the same thing we got. I only show this
one, so that you have options to choose from. Which one will be quicker for you
in the day of judgment.
Now, let’s
move to part (a) of the question and answer it quickly- no more stories.
b.
Computation of Break Even Point in Sales.
B.E.P in
value or sales = fixed cost
CMR
We have our
fixed cost which is 54,000 and CMR which is 0.61
Just divide
them by 54,000
0.61
B.E.P in
value is N88,524.59
c.
Computation of the profit at the total sales value:
If you
which, you can bring down the table again, but I think this is waste of time.
So, our profit is:
Fixed Cost
is N54,000
Total Cost
which is 56,975 for total variable cost and 54,000 for fixed costs amounted to
N110,300. Now, 145,500 total sales revenue – 110,300 total cost=35,200.
So, our
profit is N35,200.
If you want
it in a table form, it will be thus;
PRODUCT
|
|
Wafer
|
Indomie
|
Cracker
|
Nut
|
Total
|
|
Sales (Carton)
|
25
|
20
|
30
|
25
|
|
|
Selling Price Per
Carton
|
1,500
|
1,250
|
1,600
|
1,400
|
|
|
Sales Revenue:
|
37,500
|
25,000
|
48,000
|
35,000
|
145,500
|
|
Variable Cost Per Carton:
Direct material:
Direct labour:
Direct expenses:
Variable
Overhead
|
750
375
625
10,000
|
500
400
300
9000
|
1350
900
600
16,000
|
1000
625
625
14,250
|
3,600
2,300
2,150
48,250
|
|
Variable Overhead Total
|
|
|
|
|
56,300
|
|
Fixed Cost
|
|
|
|
|
54,000
|
|
Total Costs (Variable + Fixed)
|
|
|
|
|
110,300
|
|
Profit (145,000 – 110,300) =
|
|
|
|
|
35,200
|
Again, like I said in (a) part
question, the choice is still yours – either to make a table or to go ahead and
solve like that. Mind you that management accounting has no format that must be
followed.
Now, answer
to D:
d.
Computation of Margin of Safety (MOS)
Actual Sales
– Sales at Break Even
MOS= 145,500 – 88,525 = 56,975.
e.
Calculation of Break Even Point in value assuming
sales increase by 40%
Initial
sales was N145,500
We have
increase of 40% which is 0.45 x 145,500 = 58,000. Add this 58,000 to 145,500
you will get 203,500. This 203,500 is our new sales with the increase of that
40%.
So, we have
to calculate for a new CMR and then calculate for the new B.E.P.
CMR = 147,200
203,500
= 0.72
We got 147,
200 as a new contribution. When you
minus 56,300 which is our variable cost from new sales of 203,500 then you have
a new contribution of 147,200.
Then finally, our new B.E. Point in
value when sales increase by 40% is thus:
B.E.P in value = 54,000
0.72
B.E.P = N75,000
Note: We had argument on this last answer that the variable cost also
should be increased by 40%. And we will
get back to you if this part needs that 40% increase, then we will do a new
computation on this part e. But, from a to d is ok.
Warmest regards to you all.
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