Question 5 - CVP Analysis

Swansea Sports Ltd. makes cricket balls. The accountant has produced figures for three different levels of estimated production as shown in Table 1 below. Each cricket ball sells for 14.

Table 1: Budgeted Sales for Swansea Sports Ltd.

Budgeted sales (units)	20,000	25,000	30,000
Direct materials per unit	3	3	3
Direct labour per unit	4	4	4
Fixed Costs
Production overheads	46,000	46,000	46,000
Selling & distribution overheads	25,000	25,000	25,000

Required:

1. Using the profit equation, calculate the profit or loss at each level of production.

[3 Marks]

1. Prepare a Contribution Margin profit statement for budgeted sales of 30,000 units.

[5 Marks]

1. Calculate the break-even point in units.

[2 Marks]

1. Calculate the Contribution Margin Ratio (CMR) and use your answer to calculate the break-even sales revenue.

[4 Marks]

1. If the company wants to achieve a target profit of 40,000, how many units would the company need to sell?

[3 Marks]

1. The management team at Swansea Sports Ltd are considering changing their business strategy and implementing a new plan where investment in new equipment will reduce the direct labour costs per unit by 50%. Additional production overheads of 30,000 will be incurred if this plan goes ahead. Sales in units would need to be at the higher level of 30,000 units for the management team to consider this strategy. Advise management whether this plan is financially viable. Support your answer with calculations.

[3 Marks]

[Total 20 Marks]