Cost-Volume- Profit (CVP) analysis is an important tool that provide management in organizations with useful information for managerial planning and decision making. The CVP analysis is practically useful because in practice some of the important decisions management must make concern the behaviour of sales, costs and profits under varying conditions. For effective planning and decision making, it is important that management should be aware of any relationship that exists among sales, costs and profits for changing level of activities. Despite its usefulness CVP analysis has some practical limitations

Required: Briefly discuss the practical limitations of the Cost Volume profit analysis. 10marks

Angel Company limited is an alcoholic beverage company which sells strong Alcoholic drinks to their Ghanaian Market. The Company manufactures three products namely: ADONKO GINGER, ADONKO LEMON AND ADONKO PREKESE. The following are the budgeted selling prices and variable costs per sachet of the Products.

ADONKO GINGER

ADONKO LEMON

ADONKO PREKESE GHS GHS GHS Selling price 3.00 2.45 4.00 Variable cost 1.20 1.67 2.60

The company is considering expenditure on advertising and promotion that would increase sales of ADONKO GINGER .It is hoped that such expenditure, together with a reduction in the selling price of the product, would increase sales. Existing annual sales volume of the three products are:

ADONKO GINGER 460,000 sachets ADONKO LEMON 1,000,000 sachets

ADONKO PREKESE 380,000 sachets

If GHS60, 000 per annum was to be invested in advertising and sales promotion, sales of ADONKO GINGER at a reduced selling would be expected to be 590,000 sachets at GHS 2.75 per sachet or 650,000 sachets at GHS2.55 per sachet. Fixed costs are currently GHS1, 700,000 per annum.

Required: Calculate the current weighted average contribution to sales ratio and break even sales revenue of Angel limited and comment on your results. 10 marks Advise the management of Angel limited as to whether the expenditure on advertising and promotion, together with reduction in selling prices should be introduced in ADONKOE GINGER. Support your answer with calculations 10 marks