Breakeven analysis and limiting factor analysis Flashcards
The Finance Assistant from Castle Associates has recently returned from a management accounting seminar at which she was introduced to some new management accounting terms and formulae. She
has now got several of the terms and formulae mixed up in her mind.
The contribution required to breakeven is best given by which of the following?
A - Unit selling price less unit variable cost
B - Unit contribution x number of units sold
C - Total fixed costs
D - Total fixed costs/contribution ratio
C - Total fixed costs
Which two of the following show how the breakeven point in units can be calculated?
A - Total fixed costs/contribution per unit
B - Contribution required to break even/contribution per unit
C - Contribution/sales
D - Fixed costs/costs to sales ratio
A - Total fixed costs/contribution per unit
B - Contribution required to break even/contribution per unit
Breakeven point is the activity level at which there is neither a profit nor a loss. Alternatively, it is the activity level at which total contribution equals fixed costs
A company makes a single product and incurs fixed costs of £30,000 per month. Variable cost per unit is £5 and each unit sells for £15. Monthly sales demand is 7,000 units
The breakeven point in terms of monthly sales units is
A - 2,000 units
B - 3,000 units
C - 4,000 units
D - 6,000 units
B - 3,000 units
Breakeven point = Fixed costs/Contribution per unit
= £30,000/(£15 – £5)
= 3,000 units
A company manufactures a single product for which cost and selling price data are as follows:
Selling price per unit £12
Variable cost per unit £8
Fixed costs per month £96,000
Budgeted monthly sales (units) 30,000
The margin of safety, expressed as a percentage of budgeted monthly sales, is
A - 20%
B - 25%
C - 73%
D - 125%
A - 20%
Breakeven point = Fixed costs/Contribution per unit
= £96,000/(£12 – £8)
= 24,000 units
Budgeted sales = 30,000 units
Margin of safety = 6,000 units
Expressed as a % of budget = 6,000/30,000 × 100% = 20%
A company has calculated its margin of safety to be 20% of budgeted sales. Budgeted sales are 5,000 units per month and budgeted contribution is £25 per unit.
What are the budgeted fixed costs per month?
A - £25,000
B - £100,000
C - £125,000
D - £150,000
B - £100,000
Margin of safety = 20% × 5,000 units
= 1,000 units
Breakeven sales = Budget sales – Margin of safety
= (5,000 – 1,000) units
= 4,000 units
Breakeven sales volume = Total fixed costs/Contribution per unit
4,000 = Total fixed costs/£25
Total fixed costs = 4,000 × £25
= £100,000
Doer Ltd makes a single product, the Whizzo. This product sells for £15, and makes a contribution of £5 per unit. Total fixed costs per annum are £11,125
If Doer Ltd wishes to make an annual profit of £11,875 how many Whizzos do they need to sell?
A - 1,533 units
B - 2,225 units
C - 2,375 units
D - 4,600 units
D - 4,600 units
Sales units that will earn a required profit = (Fixed costs + Required profit)/Unit contribution =
(£11,125 + £11,875)/£5 = 4,600
Jackson plc expects a new venture to yield a gross profit of 50% on sales.
Fixed salary costs are expected to be £23,520 per month and other expenses are expected to be 8%
of sales.
Calculate the sales revenue necessary to yield a monthly profit of £58,800
A - £56,000
B - £140,000
C - £164,640
D - £196,000
D - £196,000
Contribution ratio = 50% – 8%
= 42%
Sales required to earn target profit = (Fixed costs + Required profit)/Contribution ratio = (£23,520 +
£58,800)/0.42 = £196,000
Xena Ltd generates a 12% contribution on its weekly sales of £280,000. A new product, Z, is to be introduced at a special offer price in order to stimulate interest in all the company’s products, resulting in a 5% increase in weekly sales of the company’s other products. Product Z will incur a variable unit cost of £2.20 to make and £0.15 to distribute. Weekly sales of Z, at a special offer price of £1.90 per unit, are expected to be 3,000 units
The effect of the special offer will be to increase the company’s weekly profit by:
A - £330
B - £780
C - £5,700
D - £12,650
A - £330
Current weekly contribution: 280,000 x 12% = 33,600
Extra contribution from 5% increase in sales = 5% × £33,600 1,680
Loss on product Z each week 3,000 × (1.90 – 2.20 – 0.15) (1,350)
—–
Weekly increase in profit 330
JJ Ltd manufactures a product which has a selling price of £14 and a variable cost of £6 per unit. The company incurs annual fixed costs of £24,400. Annual sales demand is 8,000 units.
New production methods are under consideration, which would cause a 30% increase in fixed costs
and a reduction of £1 in the variable cost per unit. The new production methods would result in a superior product and would enable the sales price to be increased to £15 per unit.
If the organisation implements the new production methods and wishes to achieve the same profit as that under the existing method, the number of units to be produced and sold annually would be:
A - 3,960
B - 4,755
C - 7,132
D - 8,915
C - 7,132
Existing profit:
Revenue = 14 x 8,000 = 112,000
Less COS: 24,400 + (8000 x 6) = (72,400)
—
39,600
Required contribution = Revised fixed costs + Required profit
= (£24,400 × 1.30) + £39,600
= £31,720 + £39,600
= £71,320
Required sales = Contribution required/Contribution per unit (revised)
= £71,320/(£15 – £5)
= 7,132 units
Which two of the following statements about traditional breakeven charts are correct?
A - The fixed costs are depicted by a straight line parallel to the vertical axis
B - The sales revenue line passes through the origin.
C - The total cost line cuts the vertical axis at the point which is equal to the period fixed costs
D - The breakeven point is the point where the sales revenue line crosses the fixed cost line.
B - The sales revenue line passes through the origin.
C - The total cost line cuts the vertical axis at the point which is equal to the period fixed costs
When using limiting factor analysis in order to calculate maximum profit, which three of the following assumptions should be made?
A - Fixed costs per unit are not changed by increases or decreases in production volume.
B - Fixed costs in total are not changed by increases or decreases in production volume.
C - Variable costs per unit are not changed by increases or decreases in production volume.
D - Variable costs in total are not changed by increases or decreases in production volume.
E - Estimates of sales demand, prices and resources required for each product are known with certainty.
B - Fixed costs in total are not changed by increases or decreases in production volume.
C - Variable costs per unit are not changed by increases or decreases in production volume.
E - Estimates of sales demand, prices and resources required for each product are known with certainty.
Fixed costs in total are not changed by increases or decreases in production volume (so that the
profit-maximising and contribution-maximising output levels are the same).
Variable costs per unit are not changed by increases or decreases in production volume and estimates of sales demand, prices and resources required for each product are known with certainty (so that contribution per unit of scarce resource is constant).
A company produces a single product for which standard cost details are as follows.
Material (£2 per kg) 8
Labour (£6 per hour) 18
Production overhead 9
Total production cost £35 per unit
The item is perishable and no inventories are held.
Demand for next period will be 6,000 units but only 19,000 hours of labour and 22,000 kg of material will be available.
What will be the limiting factor next period?
A - Material only
B - Labour only
C - Material and Labour
D - Sales demand
A - Material only
Material (£8/2) = 4 kg (× 6,000) = 24,000 kg with 22,000 kg available
Labour (£18/6) = 3 hrs (× 6,000) = 18,000 hrs with 19,000 hrs available
Sales demand is not a limiting factor because there is not sufficient material to satisfy the demand of 6,000 units.
There is sufficient labour to satisfy the demand of 6,000 units.
A company makes three products to which the following budget information relates:
B: £ per unit
Selling price: 100
Labour at £20 per hour: 40
Materials at £10 per kg: 10
Fixed Overheads: 30
—–
Profit = 20
A: £ per unit
Selling price: 120
Labour at £20 per hour: 40
Materials at £10 per kg: 20
Fixed Overheads: 40
—–
Profit = 20
T: £ per unit
Selling price: 145
Labour at £20 per hour: 60
Materials at £10 per kg: 30
Fixed Overheads: 20
—–
Profit = 35
The marketing department says the maximum annual demand is for 1,000 units of Product B, 1,200
units of product A and 1,500 units of product T, and the factory has budgeted to produce that number of units. It has just been discovered that next year materials will be limited to 5,000 kg and labour to 10,000 hours.
If the company wishes to maximise profit, the priority in which the products should be made and sold
is:
A - B then A then T
B - A then B then T
C - T then A then B
D - T then B then A
A - B then A then T
This answer ranks the products by contribution per kg of material (the limiting factor)
Maximum sales:
B: 1,000
A: 1,200
T: 1,500
Total = N/A
Material kg needed:
B: 1,000
A: 2,400
T: 4,500
Total = 7,900
Labour hours needed:
B: 2,000
A: 2,400
T: 4,500
Total = 8,900
Thus, labour is not a limiting factor but material is a limiting factor.
The products must be ranked according to their contribution per kg of material
Contribution per unit/kg of material per unit =
B: £50/1 = £50 per kg of material
A: £60/2 = £30 per kg of material
T: £55/3 = £18.33 per kg of material
A company makes three products and has produced the following standard cost cards
X: £ per unit
Selling price: 100
Variable costs:
- Material: 20
- Labour: 30
Fixed overheads: 40
—-
Profit = 10
Y: £ per unit
Selling price: 80
Variable costs:
- Material: 30
- Labour: 10
Fixed overheads: 10
—-
Profit = 30
Z: £ per unit
Selling price: 70
Variable costs:
- Material: 5
- Labour: 5
Fixed overheads: 40
—-
Profit = 20
The same labour is used to make all three products, but in different quantities.
Assume that the company can make and sell any combination of products
In a month where expenditure on labour is restricted to £50,000, what is the maximum contribution
and profit that can be earned?
A - Contribution: insufficient information to calculate, Profit: insufficient information to calculate
B - Contribution: Insufficient information to calculate, Profit: £200,000
C - Contribution: £600,000, Profit: Insufficient information to calculate
D - Contribution: £600,000, Profit: £200,000
C - Contribution: £600,000, Profit: Insufficient information to calculate
To maximise contribution, we must produce the product with the greatest contribution per £ spent
on labour
Contribution per unit:
X = 50
Y = 40
Z = 60
Labour cost per unit:
X = 30
Y = 10
Z = 5
Contribution per £ of labour:
X = 1.67
Y = 4
Z = 12
Ranking:
X = 3rd
Y = 2nd
Z = 1st
Thus the company will make £50,000/5 = 10,000 units of Z.
This will produce 10,000 × £60 = £600,000 of contribution
Remember that the fixed costs per unit are based on budgeted production quantities (not actual production) and as we do not know these quantities we cannot calculate budgeted monthly fixed costs. Therefore, there is insufficient information to calculate the profit.
Green Ltd manufactures two components, the Alpha and the Beta, using the same machines for each. The budget for next year requires the production of 4,000 units of each component.
The variable production cost per component is as follows:
Machine hours per unit:
Alpha: 3
Beta: 2
Variable production cost (£ per unit)
Alpha: 20
Beta: 36
Only 16,000 machine hours will be available next year. A sub-contractor has quoted the following unit prices to supply components: Alpha £29; Beta £40.
The optimum plan to obtain the components required is:
A - Alpha: produce 0 units, purchase 4,000 units; Beta: produce 0 units, purchase 4,000 units
B - Alpha: produce 2,000 units, purchase 2,000 units; Beta: produce 0 units, purchase 4,000 units
C - Alpha: produce 2,666 units, purchase 1,334 units; Beta: produce 4,000 units, purchase 0 units
D - Alpha: produce 4,000 units, purchase 0 units; Beta: produce 2,000 units, purchase 2,000 units
D - Alpha: produce 4,000 units, purchase 0 units; Beta: produce 2,000 units, purchase 2,000 units
The units subcontracted should be those which add least to the costs of Green Ltd. The cheapest policy is to subcontract work which adds the least extra cost per machine hour saved
Alpha:
Variable cost of internal manufacture = 20
Variable cost of buying = 29
Extra variable cost of buying = 9
Machine hours saved by buying = 3
Extra cost of buying, per hour saved = £3
Beta:
Variable cost of internal manufacture = 36
Variable cost of buying = 40
Extra variable cost of buying = 4
Machine hours saved by buying = 2
Extra cost of buying, per hour saved = £2
It is cheaper to buy Betas than to buy Alphas. Therefore, the priority for making the components in-house will be to allocate the available hours to the manufacture of Alphas
Alpha: 4,000 production units x 3 = 12,000 allocated hours
Beta: 2,000 production units x 2 = 4,000 allocated hours
—
16,000 hours
The remaining 2,000 units of Beta should be purchased from the sub-contractor
