SUMMARY OF FORMULAS Cost-Volume Profit Analysis Contribution margin per unit (CMU) = Selling price per unit - Variable cost per unit B.E.P.in units = Fixed costs/CMU B.E.P.in revenues = B.E.P. in units x SPU Margin of safety = Sales units - B.E.P. in units Units to sell to get a profit = (Fixed costs + expected profit)/CMU Profit = Total Revenues - Variable Costs - Fixed costs Cost Allocation Overhead rate Total indirect OR overhead costs Total volume allocation base Budgeting Sales Budget Budgeted sales = budgeted units x selling price per unit Production Budget Budgeted production (units) = Budgeted sales(units) + Target closing finished goods (units) - Opening finished goods (units) Material Budget Budgeted raw material usage = Required production (unit) x material required per unit Budgeted raw material purchase = Budgeted raw material + Target closing raw material stock - Opening raw material stock Cash Budget Cash Budget = opening balance + cash inflow - cash out flow + +-+ Capital Investment Decisions FV, FV2 Net Present Value (NPV) = FV FV, (1+r)! *(1 + r)2 (1+r) (1 + r)" NPV. Internal Rate of Return (IRR) = R + {PV- *(R.-R.) Accounting Rate of Return (ARR) - Average annual net profit before interest and taxes Initial Capital employed on the project Question 3 Shelfing Ltd is considering producing two possible products. The following information relates to the manufacturing of the two products: Annual fixed costs Selling price per unit Variable costs per unit Expected annual sales units Product A 140,000 45.00 17.00 4,500 Product B 72,000 36.00 18.00 5,000 Required: (Show all workings) a) For both products calculate each of the following: i. The number of units required to break-even. ii. The break-even point in sales revenue terms. iii. The expected profit or loss. iv. The margin of safety in sales units. V. The margin of safety as a percentage of sales. [10 marks) b) Explain the importance of break-even analysis for a company. Also, recommend Shelfing Ltd which product is preferable. Explain your decision and any reservations you may have. (max. 600 words) [6 marks] c) For both products, calculate the number of units which need to be sold to earn 45,000 profit. [3 marks) d) Estimate, only for Product A, what should be the selling price to earn a profit of 65,000. Discuss what could be the consequences for the company in case of an increase in the selling price. (max. 400 words) [6 marks] (Total of 25 marks)