Problem 1
Sandisk manufactures and sells pen drives. Price and cost data are as follows.
Selling Price per unit 25.00
Variable cost
Direct Materials 8.20
Direct Labour 4.00
Manufacturing overheads 6.00
Selling Expenses 1.60
Total Variable costs 19.80
Annual Fixed Costs
Manufacturing overheads 288000
Selling and Admin 414000
Total Fixed Costs 702,000
Forecasted annual sales (140,000 units) 3500000
1. What is Sandisk break even point in units?
2. What is the breakeven point in sales?
3. How many units has to be sold to earn 390,000?
4. What is the firms margin of safety
5. Management estimates that direct labour cost will increase by 10% next year. How many
units company have to sell next year to reach the break even point?
6. If the direct-labour cost increases by 10% what selling price per unit of product must it
charge to maintain the same contribution-margin ratio?
Problem 2
DJK Ltd. Is studying the acquisition of 2 electrical component insertion systems for producing its sole
product, the universal gismo. Data relevant to the systems follow
Model A
Variable Cost 8.00 per unit
Annual Fixed Cost 1971200
Model B
Variable cost 6.40 per unit
Annual Fixed cost 2227200
The selling price is 32 per unit for universal gismo. Which is subject to a 5% commission.
1. How many units must the company sell in order to breakeven if model A is selected
2. Which of the two system would be more profitable, if the sales and production are expected
to average 184,000 units per year
3. Assume that Model B requires the purchase of additional machine which is not reflected in
the preceding figure. The equipment will cost 900000 and it will be depreciated over 5 years
in a straight line method. How many units must the company sell to earn $1912800 of
income if model B is selected? As in requirement (2) sales and production are expected to
average at 184000 units.
4. Ignoring the information presented in requirement (3) at what volume level will
management be indifferent between the acquisition of model A or B
Problem 3:
TTC manufactures a line of electronic garden tools that are sold in general hardware stores. The
company’s controller, Will Fulton has just received the sales forecast for the coming year for TTC’s
three products: Hedge clippers, Line trimmers and Leaf Blowers. TTC has experienced considerable
variations in sales volume and variable costs over the past two years and Fulton believes the forecast
should be carefully evaluated from CVP point of view. The Preliminary budget information are as
follows.
Hedge Clippers Line Trimmers Leaf Blowers
Unit Sales 50000 50000 100000
Unit Selling Price 84 108 144
Variable Manuf. Cost 39 36 75
Variable Selling Cost 15 12 18
For the year TTC fixed manufacturing overhead is budgeted at 6000000 and the companies fixed
selling and admin expenses are forecasted to be 1800000. TTC has a tax rate of 40%.
1. Determine the Budgeted net income for the year.
2. Assuming the sales mix remains the same, how many units of each product TTC must sell in
order to breakeven
3. After preparing the original estimates, management determined that its variable
manufacturing cost of leaf blowers would increase by 20% and the variable selling cost of
the line trimmers were expected to increase by 3. However the management has decided
not to change the selling price of either product. In addition, management has learnt that its
leaf blowers have been perceived as the best value on the market, and it can expect to sell
three times as many leaf blowers as each of its other products. Under these circumstances,
determine how many units of each product TTC would have to sell in order to break even in
the year.
Mini Case:
Susquehanna Medical Centre (SMC) operates a general hospital in north-eastern Pennsylvania. The
medical centre also rents space and beds to separately owned entities rendering specialized services
such as paediatrics, and psychiatric care. SMC charges each separate entity for common services
such as patients’ meal and laundry and administrative services, such as billing and collections. Space
and Bed rentals are fixed charges for the year, based on bed capacity rented to each entity. SMC
charged the following costs to paediatrics for the year ended June 20, 20X5.
Patient Days Bed Capacity
Dietary 720000 -
Janitorial - 84000
Laundry 360000
Laboratory 540000
Pharmacy 420000
Repairs and Maintenance 36000
General and Admin 1560000
Rent 1800000
Billing and Collection 360000
2400000 3480000
During the year ended June 30, 20X5 paediatrics charged each patient an average of $360 per day,
had the capacity of 60 beds, and had a revenue of $7.2 million for365 days. In addition paediatrics
directly employed personnel with the following annual salary costs per employee: Supervising Nurse
$30,000; Nurse $24,000 and aides, $10,800.
SMC has the following minimum departmental personnel requirements based on total annual
budgeted patient days
Annual Patient Days Supervising Nurses Nurses Aides
Up to 22000 4 10 20
22001 to 26000 5 14 25
26001 to 29200 5 16 31
Paediatrics always employs only the minimum number of required personnel. Salaries of the
supervising nurses, nurse and aides are fixed within the range of annual patient days.
Paediatrics operated at 100% capacity on 90 days. During the year ended June 30 th 20X5.
Administrators estimate that on these 90 days, paediatrics could have filled another 20 beds above
the capacity. SMC has additional 20 beds available for rent for the year ending June 30 th 20X6. Such
additional rental would increase paediatrics’ fixed charges based on bed capacity. (In the following
requirements, ignore the income tax)
Requirements
1. Calculate the minimum number of patient days required for paediatrics to breakeven for the
year ending June 30th, 20X6, if the additional 20 beds are not rented. Patient demand is
unknown but assume that, revenue per patient day, cost per patient day, cost per bed and
salary rates will remain the same as for the year ended 20X5.
2. Assume that patient demand, revenue per patient day, cost per patient day, cost per bed
and salary rates will remain the same as for the year ended 20X5. Prepare a schedule of
paediatrics increase in revenue and increase in costs for the year ending June 30, 20X6.
Determine the net increase or decrease in paediatrics earnings from the additional 20 beds if
paediatrics rents this extra capacity from SMC