A company manufactures a single product which has the following cost structure based on a
production budget of 10,000 units.
Materials4 kg at Shs.30/kgShs.120
Direct labour5 hours at Shs.70/hourShs.350
Variable production overheads are recovered at the rate of Shs.80per direct labour hour.
Other costs incurred by the company are:
Shs.
Factory fixed overheads1,200,000
Selling and distribution overheads1,600,000
Fixed administration overheads800,000
The selling and distribution overheads include a variable element due to a distribution cost of
Shs.20per unit.
The fixed selling price of the unit is Shs.1290.
Required
(a)Calculate how many units have to be sold for the company to breakeven
(b)Calculate the sales revenue which would give a net profit of Shs.400, 000.
(c)If the company could buy in the units instead of manufacturing them, calculate how
much it would be prepared to pay if both:
i.Estimated sales for next year are 9,500 units at Shs.1290each;and
ii.Shs.1,975,000 of fixed selling, distribution and administrative overheads
would still be incurred even if there is no production (all other fixed overheads
would be saved).

CQ 4 CVP Analysis _002
A 90-room Kisumu Hotel has an average room rate of Shs6,560. Its fixed costs are Shs30,
000,000 a year, and its variable costs total Shs 47, 600,000 at an average occupancy of 70
percent (%).
Required:
a.What is the Hotel’s breakeven occupancy percentage?
b.What level of sales revenue is required to provide an operating income (before taxes)
of Shs 10, 000, 000 a year?
c.If the average room rate is increased by Shs 800, and operating income of
Shs10,000,000 a year is wanted, how many fewer rooms per night would need to be
sold than was the case in part b?
d.Wage rates for housekeepers are to be increased by Shs 400 an hour. It takes a
housekeeper 1/2 hour to clean a room. Other cost increases will cause an increase of
Shs100 in the variable costs per room occupied. Fixed wages and other fixed costs are
expected to increase Shs 400,000 per month. To compensate for the increase in room
rate to Shs7, 360 (see part c), Shs 3,000,000 more per year is to be spent on advertising.
Operating income (before tax) is to increase 20 percent (%) over the present Shs10,
000,000 per year. What level of sales revenue is required? What is the sales revenue in
terms of occupancy percentage?