QUESTION 1 (10 marks; 18 minutes) State whether the following statements are true or false; 1.1 To perform cost-volume-profit analysis, a company must be able to separate costs into fixed and variable components. T 1.2 Cost-volume-profit analysis may be used for multi-product analysis when the proportion of different products remains constant. F 1.3 It is assumed in CVP analysis that the unit selling price, unit variable costs, and unit fixed costs are known and constant. T In CVP analysis, variable costs include direct variable costs, but do not include indirect variable costs. 1.5 Margin of safety measures the difference between budgeted revenues and breakeven revenues. 1.6 One assumption frequently made in cost behaviour estimation is that changes in total costs can be explained by changes in the level of a single activity, F A linear cost function can only represent fixed cost behaviour. 1.7 1.8 In a graphical display of a cost function, the steepness of the slope represents the total amount of fixed costs. 1.9 knowing the proper relevant range is essential to properly classify costs. I 1.10 An example of a physical cause-and-effect relationship is when additional units of production increase total direct material costs. 1 QUESTION 2 (15 marks; 27 minutes) The following information has been provided for Walsh Corporation: Sales price per unit Variable costs per unit Fixed costs R20 R10 R500 Required: Prepare a cost-volume-profit graph (using units from 10 to 100, in multiples of 10) and identify the following items: 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 Total cost line Total fixed cost line Total variable cost line Total revenue line Loss area Profit area Compute the break-even point in units Compute the break-even point in sales rands QUESTION 3 (8 marks; 14.4 minutes) Ww Vredenburg is a small car dealership. On average, it sells a car for R250 000 which it purchases from the manufacturer for R220 000. Each month, VW Vredenburg pays R60 000 in rent and utilities and R60 000 for salespeople's salaries. In addition to their salaries, are paid a commission of R5 000 for each car they sell. WW Vredenburg also spends R10 000 each month for local advertisements. Its tax rate is 40%. a. How many cars must WW Vredenburg sell each month to break-even? (3) Reisen Travel offers helicopter services from suburban towns to John F. Kennedy International Airport in New York City. Each of its 10 helicopters makes between 1000 and 2000 round trips per year. The records indicate that a helicopter that has made 1000 round trips in the year incurs an average operating cost of R300 per round trip, and one that has made 2000 round trips in the year incurs an average operating cost of R250 per round trip. Using the Hi-Lo method, estimate the linear cost function during the year. (5) Question 4 (7 marks; 12.6 minutes) Tiffany Shaden, head of human resource department at a large textile firm in KwaZulu-Natal received the data below from Li Ming Yuan, the head of the accounting department. Unfortunately Tiffany was involved in a car accident. You are requested to help Tiffany interpret the data for the claims process. The cost driver is the number of claims processed. a. Develop a cost function from the data given. Evaluate the coefficient of determination ! b. C. Estimate the costs when 8 000 claims are processed. QUESTION 5 (10 mark; 14.4 minutes) A company provided the following information: Sales Variable costs Fixed costs R500 000 R100 000 R200 000 sales Required: 5.1 What is the contribution margin ratio? 5.2 What is the level of sales in rands necessary to generate a profit of R40 000? 5.3 What is the contribution margin ratio if the sales price is increased by 10%? SEO 5.4 Using the information in 4.3, what level of sales in rands is necessary to generate a profit of R40 000? 5.5 Calculate the degree of operating leverage