Question
Porter Limited CVP Scenarios Porter Limited manufactures a single product which has the following cost structure based on an annual production budget of 10,000 units:
Porter Limited CVP Scenarios
Porter Limited manufactures a single product which has the following cost structure based on an annual production budget of 10,000 units:
Materials 4kgs @ 3 per kg 12
Variable direct labour 5 hours @ 7 per hour 35
Variable production overheads are recovered at a rate of 8 per direct labour hour. Other annual costs incurred by the company are as follows:
Factory fixed overheads 120,000
Selling and distribution overheads 160,000
Administration fixed overheads 80,000
The selling and distribution overheads are all fixed except for a variable element due to a distribution cost of 2 per unit.
The selling price per unit is 129.
REQUIREMENTS:
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Calculate the number of units to be sold for the company to break even.
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Calculate the margin of safety as a percentage of budgeted output.
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Calculate the revenue that will produce a net profit of 40,000.
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Calculate the effect on the number of units to be sold for the company to break even if the following scenario occurred: a 5% increase in both the factory and administration fixed overheads, together with an increase in the labour rate to 8 per hour and replacement of the variable distribution cost of 2 per unit with a fixed annual distribution cost of 18,150.
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Explain what you consider to be the value to managers of cost-volume-profit analysis, using brief examples to support your observations.
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