Questions of CVP Analysis
Prob. 1: The following information relates to Big Jobs Clothing for the year 2023:
Particulars Amount
(₹ )
Sales Revenue 10,00,000
Cost of Goods Sold (40% of sales revenue) 4,00,000
Gross Margin 6,00,000
Operating Cost:
Salaries 3,00,000
Sales Commissions (10% of sales) 1,00,000
Depreciation on Equipment and Fixtures 24,000
Store Rent (₹8,000 per month) 96,000
Other Operating Costs 1,00,000
Total Operating Costs 6,20,000
Operating Income (Loss) (20,000)
Additional Information:
An analysis of other operating costs reveals that it includes ₹ 80,000 variable costs (which
vary with sales volume) and ₹ 20,000 fixed costs. Mr. Nitin, the owner of the store, is
dissatisfied with the operating results and wants to analyze performance using a contribution
margin approach.
Required:
I. Compute the Contribution Margin of Big Jobs Clothing.
II. Compute the Contribution Margin Ratio.
III. Mr. Nitin estimates that sales revenue can be increased by 20% if the company spends
an additional ₹ 20,000 on advertising. Calculate the impact of this change on
operating income.
Prob. 2: Thomas Cook India generates average revenue of Rs. 20,000 per person on its 5-day
package tour to Goa. The variable costs per person are as follows:
Airfare ₹ 5,000
Hotel accommodation ₹ 2,000
Meals ₹ 3,000
Ground transportation ₹ 3,000
Park tickets and other costs ₹ 1,000
Total ₹ 14,000
Annual total fixed costs Rs. 18,00,000
I. Calculate the number of package tours that must be sold to break even.
II. Calculate the revenue needed to earn a target operating income of Rs. 6,00,000.
III. If fixed costs increase by $3,00,000, what decrease in variable cost per person must be
achieved to maintain the breakeven point calculated in requirement ‘I’?
Prob. 3: Birla Company manufactures and sells adjustable canopies that attach to motor
homes and trailers. The following data relate to the company’s current year budget:
Particulars Amount (₹)
Selling Price per canopy 20,000
Variable Cost per canopy 10,000
Annual Fixed Costs 50,00,000
Budgeted Net Income (after tax) 1,20,00,000
Income Tax Rate 40%
During the first five months of the year, the company sold only 350 units at the established
price, with variable costs as planned. It became apparent that the budgeted net income target
would not be achieved unless corrective actions were taken.
A management committee analyzed the situation and proposed the following three mutually
exclusive alternatives to the company’s president:
Alternative A:
Reduce the selling price by ₹2,000. The sales department estimates that at this lower price,
2,700 units can be sold during the remainder of the year.
Fixed costs and variable cost per unit will remain unchanged.
Alternative B:
Reduce the variable cost per unit by ₹500 through the use of cheaper direct materials and
modified manufacturing techniques. The selling price will also be reduced by ₹1,500.
Expected sales volume for the remainder of the year is 2,200 units.
Fixed costs will remain unchanged.
Alternative C:
Reduce fixed costs by ₹5,00,000 and lower the selling price by 5%.
Variable cost per unit will remain unchanged. Expected sales volume for the remainder of the
year is 2,000 units.
Required:
I. Assuming no changes are made to the company’s current selling price or cost
structure, determine:
i. The break-even point (in units).
ii. The number of units that must be sold to achieve the target net income of
₹1,20,00,000 (after tax).
II. Evaluate each of the three proposed alternatives (A, B, and C) and determine which
alternative Birla Company should adopt to achieve or come closest to its net income
objective. Support your answer with appropriate calculations and reasoning.
Prob. 4: Singhania Tax Preparation Services has total budgeted revenues for 2025 of
61,80,000, based on an average price of ₹20,600 per tax return prepared. The company
would like to achieve a margin of safety percentage of at least 45%. The company's current
fixed costs are 32,76,000, and variable costs average 2,400 per customer.
(Consider each of the following separately).
I. Calculate Singhania's breakeven point and margin of safety in units.
II. Which of the following changes would help Singhania achieve its desired margin of
safety?
i. Average revenue per customer increases to ₹22,400.
ii. Planned number of taxes returns prepared increases by 15%.
iii. Singhania purchases new tax software that results in a 5% increase to fixed costs
but e-files all tax returns, which reduces mailing costs an average 200 per
customer.
Prob. 5: Harisons Furnishings is organizing a two-week carpet sale at Richi Rich, a local
warehouse store. The company plans to sell carpets at a price of ₹5,000 each. Harisons will
purchase the carpets from a local distributor at ₹3,500 per unit, with the privilege of returning
any unsold units for a full refund.
For the use of selling space, Richi Rich has offered Harisons two rental payment alternatives:
Option 1: A fixed payment of ₹50,000 for the entire sale period.
Option 2: 10% of total sales revenue earned during the sale period.
Assume that Harisons will incur no other costs.
Required:
I. Calculate the breakeven point in units under each option:
(a) Option 1 – Fixed rental payment
(b) Option 2 – Percentage of total sales revenue
II. Determine the level of total revenue at which Harisons will earn the same operating
income under both options.
III. Identify the preferred option under different sales levels:
(a) For what range of unit sales will Harisons prefer Option 1?
(b) For what range of unit sales will Harisons prefer Option 2?
IV. Calculate the Degree of Operating Leverage (DOL) at a sales volume of 100 units for
both rental options.
V. Interpret your findings from requirement (IV), explaining what the results indicate
about the risk and profit potential associated with each rental option.
Prob. 6: The Lee Company has three product lines of belts: X, Y and Z with contribution
margins of ₹15, ₹10 and ₹5, respectively. The president foresees sales of 1,00,000 units in
the coming period, consisting of 10,000 units of X, 50,000 units of Y and 40,000 units of Z.
The company's fixed costs for the period are ₹ 5,10,000.
I. Wha is the company's breakeven point in units, assuming that the given sales mix is
maintained.
II. If the sales mix is maintained, what is the total contribution when 1,00,000 units are
sold? What is the operating income?
III. What would be operating income be if 10,000 units of X, 40,000 units of Y and
50,000 units of Z were sold? What is the new breakeven point in units if these
relationships persist in the next period?
Prob. 7: Far Point Spread is a top-selling electronic spreadsheet product. Far Point
Technologies India is about to release version 5.0. It divides its customer into two groups:
new customers and upgrade customers (those who previously purchased far Point Spread 4.0
or earlier versions). Although the same physical product is provided to each customer group,
sizable differences exist in selling prices and variable Marketing costs:
Particulars New Customers Upgrade Customers
Selling price 10,500 6,000
Variable costs
Manufacturing 1,250 1,250
Marketing 3,250 4,500 750 2,000
Contribution margin 6,000 4,000
The fixed costs of Far Point Spread 5.0 are ₹1,40,00,000. The planned sales mix in units is
60 per cent new customers and 40 percent upgrade customers.
I. What is the Far Point Spread 5.0 breakeven point in units, assuming that the planned
60 percent/40 percent sales mix is attained?
II. If the sales mix is attained, what is the operating income when 2,00,000 units are
sold?
III. Show how the breakeven point in units changes with the following customer mixes:
i. New 50 percent/Upgrade 50 percent.
ii. New 90 percent/Upgrade 10 percent.
iii. Comment on the results.
Prob. 8: Lakme manufacturers and sells a face cream to small ethnic stores in Northen India.
It presents the monthly operating income statement shown here to Amit, a potential investor
in the business. Help Amit understand Lakme’s cost structure.
Lakme Cosmetics
Operating Income Statement June 2017
Particulars Amount (₹) Amount
(₹)
Units sold (10,000 units)
Revenues 10,00,000
Cost of Goods Sold
Variable Manufacturing Costs 5,50,000
Fixed Manufacturing Costs 2,00,000
Total 7,50,000
Gross Margin 2,50,000
Operating Costs
Variable Marketing Costs 50,000
Fixed Marketing & Administration Costs 1,00,000
Total Operating Costs 1,50,000
Operating Income 1,00,000
I. Recast the Income Statement to emphasize contribution margin.
II. Calculate the contribution margin percentage and breakeven point in units and
revenues for June 2017.
III. What is the margin of safety (in units) for June 2017?
IV. If Sales in June were only 8,000 units and Lakme’s tax rate is 30%. Calculate the net
income.