ASSESSMENT : COST VOLUME PROFIT (CVP) ANALYSIS

Question 1

Abby's Cookies Sdn Bhd is a company which produces and sells cookies called "Mint Cookies". Each tin of Mint Cookies consists of 500 grams of cookies which is sold at a price of RM50. Market research shows that the company could sell at least 15,000 tins per year. Expected costs and revenues at expected sales of 15,000 tins are given below.

RM

Cost of goods sold 475,000

General and administrative expenses 45,000

Selling and distribution expenses 37,500

Sales revenue 750,000

The cost of goods sold consists of RM300,000 variable and RM175,000 fixed. All general and administrative expenses are fixed costs. Meanwhile, selling and distribution expenses consist of RM30,000 variable and the remaining is fixed cost.

REQUIRED:

a.According to the information above,

i.Can the company breakeven at sales level of 15,000 tins? Explain your answer.

ii.What is the total sales that must be generated by the company in order to earn a profit of RM175,000?

(10marks)

b.Refer to the original data. For the next coming period, the company plans to introduce a new product called "Butter Cookies". Butter cookies can be sold at RM35 per tin with the variable costs of RM20 per unit. You are given the following proposals:

Proposal 1

Mint Cookies 60% & Butter Cookies 40%

Proposal 2

Mint Cookies 40% & Butter Cookies 60%

The introduction of new product line will increase the total fixed costs of the company by RM22,500.

i.Calculate the Total Breakeven Point (in units) for both proposals. Based on your answer, which proposal would you choose and why?

ii.Using the Proposal 1 sales mix, determine the number of units of each product that must be sold to obtain profit of RM206,000.

iii.Explain TWO (2) assumptions of cost volume profit analysis.