SMRM MI Chapter 10 CVP Analysis ICAB CL

1. S M Rahmatul Mujeeb, FCA
ICAB– KL_MI—Synopsis_Chapter 10 - Breakeven Analysis and Limiting Factor Analysis 1 | P a g e
Chapter 10
Breakeven Analysis and Limiting Factor Analysis
#. CVP Analysis--
Cost volume profit analysis (CVP analysis) is one of the most powerful tools. It helps to study of the interrelationship between cost,
volume, and profit in an organization by focusing on interactions among the following five elements:
1. Prices of products
2. Volume or level of activity
3. Per unit variable cost
4. Total fixed cost
5. Mix of product sold
Because cost-volume-profit (CVP) analysis helps managers understand the interrelationships among cost, volume, and profit it is a vital
tool in many business decisions. These decisions include,
1. What products to manufacture or sell and service to offer?
2. What pricing policy to follow?
3. What marketing strategy to employ?
4. What basic cost structure to use? and
5. What type of productive facilities to acquire?
#. Contribution Margin (CM)—
Contribution is a term meaning ‘making a contribution towards covering fixed costs and making a profit’.
Contribution margin is the amount remaining from sales revenue after variable expenses have been deducted. Thus it is the amount
available to cover fixed expenses and then to provide profits for the period. Contribution margin is first used to cover the fixed expenses
and then whatever remains go towards profits. If the contribution margin is not sufficient to cover the fixed expenses, then a loss occurs
for the period. This concept is explained in the following equations:
 Sales revenue − Variable cost* = Contribution Margin
 Contribution margin − Fixed cost* = Net operating Income or Loss
*Both Manufacturing and Non-Manufacturing
#. Contribution Margin (CM) Ratio—
The contribution margin as a percentage of total sales is referred to as contribution margin ratio (CM Ratio).
Formula or equation of CM ratio is as follows:
CM Ratio (in Taka) = Contribution Margin / Sales
This ratio is extensively used in cost-volume profit calculations. The CM Ratio is a measure of how much contribution is earned from
each Tk. 1/= sales revenue.
Alternatively, CM ratio can also be computed as follows:
CM Ratio (Per Unit) = Contribution Margin per Unit / Sales per unit
#. Break-Even Point (BEP)—
Break-even point is the level of sales at which profit is zero. According to this definition, at break-even point sales are equal to fixed cost
plus variable cost. This concept is further explained by the following equation:
Break even sales = fixed cost + variable cost
The break-even point can be calculated using either the equation method or contribution margin method. These two methods are
equivalent.
Equation Method:
The equation method centers on the contribution approach to the income statement. The format of this statement can be expressed in
equation form as follows:
Profit = (Sales − Variable expenses) − Fixed expenses
Rearranging this equation slightly yields the following equation, which is widely used in Cost Volume Profit (CVP) analysis:
Sales = Variable expenses + Fixed expenses + Profit
According to the definition of break-even point, break-even point is the level of sales where profits are zero. Therefore the break-even
point can be computed by finding that point where sales just equal the total of the variable expenses plus fixed expenses and profit is
zero.
#. Margin of Safety (M/S)—
Margin of safety (M/S) is the excess of budgeted or actual sales over the break even volume of sales. It stats the amount by which sales
can drop before losses begin to be incurred.
Formula of Margin of Safety:
The formula or equation for the calculation of margin of safety is as follows:
Margin of Safety = Total budgeted or actual sales − Break even sales

2. S M Rahmatul Mujeeb, FCA
ICAB– KL_MI—Synopsis_Chapter 10 - Breakeven Analysis and Limiting Factor Analysis 2 | P a g e
The margin of safety can also be expressed in percentage form. This percentage is obtained by dividing the margin of safety in dollar
terms by total sales. Following equation is used for this purpose.
Margin of Safety = Margin of safety in taka / Total budgeted or actual sales
#. CVP graph or breakeven chart-
The relationships among revenue, cost, profit and volume can be expressed graphically by preparing a cost-volume-profit (CVP) graph
or break even chart. A CVP graph highlights CVP relationships over wide ranges of activity and can give managers a perspective that
can be obtained in no other way.
#. Underlying assumptions of cost volume profit (CVP) analysis-
A number of assumptions underlie cost-volume-profit (CVP) analysis: These cost volume profit analysis assumptions are as follows:
1. Selling price is constant. The price of a product or service will not change as volume changes.
2. Costs are linear and can be accurately divided into variable and fixed elements. The variable element is constant per unit, and
the fixed element is constant in total over the relevant range.
3. In multi-product companies, the sales mix is constant.
4. In manufacturing companies, inventories do not change. The number of units produced equals the number of units sold.
Problem 1:
a) Operations of Gilley Company for the year disclosed an M/S ratio of 20% and a C/M ratio of 60%. Fixed cost amounted to Tk. 30,000.
Required:
1. Break-even sales
2. The amount of profit
3. The contribution margin.
b) Reggin Specialty Products Company manufactures a product which sells for Tk. 5. At present the company produces and sells 50,000
units per year. Unit variable manufacturing and marketing expenses are Tk 2.50 and Tk. 0.50 respectively. Fixed expenses are Tk.
70,000 for factory overhead and Tk. 30,000 for marketing and administration.
The sales manager has proposed that the price be increased to Tk. 6. To maintain the present sales volume, advertising must be
increased. The company's profit objective is 10% of sales.
Required:
1. Compute the additional expenditure the company can afford for advertising.
2. Compute the new breakeven point in units and taka, using the Tk. 6 sales price and the additional advertising expenditure from
requirement (1)
Problem 2:
Fenton Office Equipment Company collected the following data for the second quarter of the year.
Month Sales Cost
April 70,000.00 56,000
May 77,000.00 59,990
June 85,000.00 64,550
Required: Compute the following amounts:
1. The fixed costs and the variable costs per sales taka.
2. The contribution margin ratio
3. The break-even point
4. July profit if sales are 79,000/=
5. August sales if the month's loss is 1,050/=

3. S M Rahmatul Mujeeb, FCA
ICAB– KL_MI—Synopsis_Chapter 10 - Breakeven Analysis and Limiting Factor Analysis 3 | P a g e
Problem 3:
Maxwel Company manufactures and sales a single product, for which price and cost data is as follows.
Sales Per Unit 25.00
Variable cost per unit:
Raw materials 11.00
Direct labour 5.00
Factory overhead 2.50
Marketing and administrative 1.30
Total cost per unit 19.80
Annual fixed costs:
Factory overhead 192,000.00
Marketing and administrative 276,000.00
468,000.00
Income tax rate 40%
Required:
1. Compute the break-even point in units
2. Determine the units to sell in order to earn 156,000 after income tax
3. Compute the break-even point in units if direct labour cost increases 8%.
4. If Maxwell's direct labour cost does increase 8%, determine the per unit sales price to maintain the same contribution margin
ratio
Problem 4:
Linde Ltd. Manufactures and sells a single products, with the following estimated costs for the next year:
Description
100,000
Output
150,000
Output
Variable Materials 20.00 20.00
Variable Labour 5.00 5.00
Production Overhead 10.00 7.50
Marketing Costs 7.50 5.00
Administrative Costs 5.00 4.00
47.50 41.50
Prepare Breakeven point (both in unit & Taka) if company sells at 150,000 output @ Tk. 49.50.
Problem 5:
JP co. is a joint venture company to yield a GP of 50% of sales
Fixed Salary cost are expected to be Tk. 23,520 per month and other expenses would be 8% on sales
Calculate the sales revenue to yield a profit of Tk. 58,800 monthly.
#. Limiting Factor Analysis-
A limiting factor/Key Factor is anything which limits the activity of an entity. A limiting factor could be sales, raw materials, labour,
Overheads. In a limiting factor, maximize the contribution per unit of the limiting factor is required.
A limiting factor could be sales if there is a limit to sales demand but any one of the organisation's resources (labour, materials and so
on) may be insufficient to meet the level of production demanded.
It is assumed in limiting factor analysis that management wishes to maximize profit and that since there is no change in the fixed cost
incurred profit will be maximized when contribution is maximized. The limiting factor decision therefore involves the determination of the
contribution earned by each different product or service from each unit of the limiting factor.

4. S M Rahmatul Mujeeb, FCA
ICAB– KL_MI—Synopsis_Chapter 10 - Breakeven Analysis and Limiting Factor Analysis 4 | P a g e
Problem 6:
Harvey is currently preparing its budget for the year ending 30 September 20X2. The company manufactures and sells three products,
Beta, Delta and Gamma.
The unit selling price and cost structure of each product is budgeted as follows.
Beta Delta Gamma
CU CU CU
Selling price 100 124 32
Variable costs:
Labour 24 48 6
Materials 26 7 8
Overhead 10 5 6
60 60 20
The labour rate is budgeted at CU6 per hour, and fixed costs at CU 1,300,000 per annum. The company has a maximum production
capacity of 228,000 labour hours.
A meeting of the board of directors has been convened to discuss the budget and to resolve the problem as to the quantity of each
product which should be made and sold. The sales director presented the results of a recent market survey which reveals that market
demand for the company's products will be as follows.
Product Units
Beta 24,000
Delta 12,000
Gamma 60,000
The production director proposes that since Gamma only contributes CU12 per unit, the product should no longer be produced, and the
surplus capacity transferred to produce additional quantities of Beta and Delta. The sales director does not agree with the proposal.
Gamma is considered necessary to complement the product range and to maintain customer goodwill. If Gamma is not offered, the sales
director believes that sales of Beta and Delta will be seriously affected. After further discussion the board decided that a minimum of
10,000 units of each product should be produced. The remaining production capacity would then be allocated so as to achieve the
maximum profit possible.
Requirement
Prepare a budget statement which clearly shows the maximum profit which could be achieved in the year ending 30 September 20X2.
---Previous Exam Questions---
May June 2010:
(Q8 -Marks 6):
A company has sales of Tk. 12,000,000 @ Tk. 100 per unit, marginal cost per unit Tk. 60 and Fixed costs Tk. 3,000,000.
Calculate:
i) Break‐even‐point in units and value terms
ii) Profit on the sales
iii) Margin of safety in case the sales volume is reduced by 10%.
May June 2011:
(Q1C -Marks 5):
A company produces three products for which the following operating statement has been presented:
Sales 320,000 450,000 400,000 1,170,000
Total costs 350,000 300,000 300,000 950,000
Net profit/Loss (30,000) 150,000 100,000 220,000
The total costs comprise variable costs 70% and fixed costs 30% .The directors consider that as product shows a loss it should be
discontinued, Based on the above cost data, should product A be dropped? Justify.
(Q 7 – Marks 9):
The XYZ Company sales of TK. 2,00,000 and a margin of safety of 25%, p/v 33.33%. A decrease of fixed expenses and a decrease of
sales prices have changed margin of safety to 40% and P/V to 30%.
Required:
(a) By what amount did sales decrease? (b) What is the new BEP? (c) What is the new net profit?

5. S M Rahmatul Mujeeb, FCA
ICAB– KL_MI—Synopsis_Chapter 10 - Breakeven Analysis and Limiting Factor Analysis 5 | P a g e
Nov-Dec 2011:
(Q 3B – Marks 6):
The current sales of a manufacturing company is in average 40,000 units at Tk.10 each. The costs are:
Prime costs Tk.2,00,000
Variable overhead Tk. 40,000
Fixed overhead Tk.1,00,000
Calculate:
(i) The Break-even sales in units
(ii) The additional sales in units, required to maintain the current profits level if the selling price is reduced by 10%.
Nov-Dec 2012:
(Q 3B – Marks 12):
The present cost of a product is as follows:
Taka
Variable costs per unit 450
Fixed costs per unit 100
Total costs per unit 550
The overhead charges were established taking normal operation of 20,000 units of production and sales during a year. The product is
sold at Tk 1,000 per unit less 5% commission to the dealers.
You are required to:
i) Calculate the break-even sales in units.
ii) Calculate the additional sales in units required to maintain the current profits level if the selling price is reduced by 10%.
May – June 2013:
(Q 6 – Marks 10):
X Company makes and sells a single product, for which variable costs are as follows:
Taka
Materials 10
Labour 8
Production overhead 6
24
The sales price is Taka 30 per unit and fixed cost per annum is Taka 68,000. The company wishes to make a profit of Taka 16,000 per
annum.
Required: Determine the sales required to achieve this profit.
May – June 2014:
(Q 3b – Marks 7):
The current sales of a manufacturing company is in average 40,000 units at Tk.10 each. The costs are:
Prime costs Tk.2,00,000
Variable overhead Tk.40,000
Fixed overhead Tk.1,00,000
Calculate:
(i) The Break‐even sales in units
(ii) The additional sales in units, required to maintain the current profit level if the selling price is reduced by 10%.
Nov - Dec 2014:
(Q 5b – Marks 14):
W Limited sells one product for which data is given below:
Taka per unit
Selling price 10
Variable cost 6
Fixed cost 2
The fixed costs are based on a budgeted level of activity of 5,000 units for the period.
Requirement:
i. How many units must be sold if W Limited wishes to earn a profit of Tk. 6,000 for one period?
ii. What is W Limited's margin of safety for the budget period if fixed costs prove to be 20% higher than budgeted?
iii. If the selling price and variable cost increase by 20% and 12% respectively, by how much must sales volume change compared with
the original budgeted level in order to achieve the original budgeted profit for the period?

6. S M Rahmatul Mujeeb, FCA
ICAB– KL_MI—Synopsis_Chapter 10 - Breakeven Analysis and Limiting Factor Analysis 6 | P a g e
May – June 2015:
(Q 4b – Marks 5):
The following variable costs are incurred producing each unit of product F.
Taka per unit
Variable Material 8
Variable labour at Tk. 14 per hour 42
Variable production overheads are incurred at the rate of Tk.4 per hour. Fixed production overheads of Tk. 60,000 are absorbed on the
basis of 25,000 budgeted direct labour hours. Other overheads are recovered at five percent of total production cost. If selling prices are
set to recover the full cost plus 50%, calculate the selling price per unit of product F?
Nov – Dec 2015:
(Q 7c – Marks 5):
Lisa and Moly make and sell the “Kitchen Mystic,” a wall hanging depicting a witch. The Kitchen Mystics are sold at specialty shops for
BDT50 each. The capacity of the plant is 15,000 Mystics per year. Costs to manufacture and sell each wall hanging are as follows:
Direct material BDT5.00
Direct labor BDT6.00
Variable overhead BDT8.00
Fixed overhead BDT10.00
Variable selling expenses BDT2.50
Lisa and Moly have been approached by an English company about purchasing 2,500 Mystics. The company is currently making and
selling 15,000 per year. The English company wants to attach its own label, which increases costs by BDT.50 each. No selling expenses
would be incurred on this order. Lisa and Moly believe that they must make an additional BDT1.00 on each wall hanging to accept this
offer.
Required:
a. What is the opportunity cost per unit of selling to the English organization? 3
b. What is the minimum selling price that should be set?
May – June 2016:
(Q 7b – Marks 15): Limiting Factors
POV Ltd manufactures three products – X, Y and Z – that use the same machines. The budgeted income statements for the three
products are as follows:
However, after the budget had been formulated, an unforeseen condition has meant that during the next period the available machine
capacity has been limited to 296,500 hours.
Required to calculate:
i. The shortfall in machine hours.
ii. The contribution earned per machine hour used on product X, Y and Z.
iii. The maximum number of units to be manufactured of each product.
Nov-Dec 2016:
(Q 6c – Marks 8): Limiting Factors
Rahim Enterprise can produce any of three products with its current production line. The heat treating equipment has 400 hours
available during any given month. Per unit production, sales, and cost statistics are as follows:

7. S M Rahmatul Mujeeb, FCA
ICAB– KL_MI—Synopsis_Chapter 10 - Breakeven Analysis and Limiting Factor Analysis 7 | P a g e
Required:
i. How many of each product should Rahim Enterprise produce and sell?
ii. Suppose the selling price of C increases to Tk.12. How many of each product should Rahim Enterprise produce and sell?
May-Jun 2017:
(Q 2 – Marks 20): Limiting Factors
A business manufactures high quality bags. The following information relates to four different products of the business:
Due to the specialist nature of the work, only 150,000 skilled labor hours are available in the next quarter.
Required:
(a) Explain, using two examples, what is meant by a limiting factor?
(b) How may a company overcome a limiting factor?
(c) Advise the business on the mix of products that it should produce during the quarter in order to maximize profit if labor hours are
limited to 150,000 hours.