Cost-volume profit analysis (break-even analysis)

April 2025

2 Questions

Question 4c

Wingu Ltd. manufactures and sells blankets and has the following costs and selling price structure:

	Sh. Per unit	Sh. Per unit
Selling price		1,200
Direct material	220
Direct labour	360
Variable overhead	140
Fixed overhead	120	(840)
Net profit		360

Additional information:

1. The fixed overhead absorption rate is based on the budgeted activity level of 5,000 units per month. Assume that fixed overheads are incurred evenly each period.

2. Budgeted sales for next month amounted to 3,500 units.

Required:

(i) The break-even point in sales units per month.

(ii) The margin of safety for the next month.

(iii) The budgeted profit for the next month.

(iv) The sales units required to achieve a target profit of Sh.552,000 in a month.

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Question 3c

Masomo Publishers Ltd. has been making and selling different types of exercise books. The publishers operate absorption costing system.

A summary of the company’s budgeted profit statements for its next week, when it expects to be operating at 75% of capacity is given below:

Types of exercise book ........................................	200 pages “Sh.per.unit”	96 pages “Sh.per.unit”	120 pages “Sh.per.unit”
Direct material cost	60	22	26
Direct labour cost	25	10	20
Variable.overhead.cost	5	3	6
Fixed overhead cost	20	20	20
Net profit/(loss)	10	(5)	8
Retail selling price	120	50	80

The market demand for the exercise books and time required per unit has been analysed as follows:

Product	Expected demand per week (units)	Machine hours per unit required
200 pages book	8,000	15 minutes
96 pages book	25,000	45 minutes
120 pages book	22,000	30 minutes

Additional information:

1. There is a maximum of 20,250 machine hours available per week.

2. Fixed costs budgeted are Sh.1,100,000 per week.

Required:

(i) The optimal production mix in units.

(ii) The resultant net profit at optimal production mix.

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December 2024

1 Questions

Question 5b

Maya Ltd. produces two products namely; Product M and Product Y. The following budget applies for the year ended 30 June 2024.

	Product M Sh.	Product Y Sh.
Selling price	6	12
Variable costs	2	4
Contribution margin	4	8
Fixed costs (Sh.)	96,400,000	200,000,000
Units sold (bags)	70,000,000	30,000,000

Required:

(i) The break-even points at current sales mix.

(ii) The break-even point at a proposed sales mix of 1:1.

(iii) Current margin of safety.

(iv) Sales units required to earn a profit of Sh.299,000,000 at current sales mix

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August 2024

2 Questions

Question 1c

Medico Ltd. is a pharmaceutical company which manufactures three types of medicines namely; Alpha, Beta and Zeta using absorption costing system.

The company has two grades of labour; skilled labour and semi-skilled labour.

The following profit statement relates to the operations of Medico Ltd.

	Alpha Sh.	Beta Sh.	Zeta Sh.
Selling price per unit	595	870	1,095
Cost per unit:
Direct material	115	140	220
Direct labour:
Skilled labour (Sh.80 per hour)	80	160	240
Semi-skilled (Sh.60 per hour)	60	120	110
Fixed overhead cost (see note 1)	100	100	100
Total cost per unit	355	520	670
Net profit per unit	240	350	425
	Units	Units	Units
Expected maximum production and demand	3,000	5,000	6,500

Additional information:

1. Fixed overhead costs are Sh.1,450,000 per annum.

2. Variable overheads are absorbed into production at a rate of 100% for skilled labour and 50% of the semiskilled labour. These variable overheads have not been absorbed in the profit statement above.

3. There is a maximum of 28,000 skilled labour hours available.

4. Deficit units can be outsourced from chemist suppliers at the following prices:

Medicine	Alfa	Beta	Zeta
Purchase price per unit	Sh.425	Sh.650	Sh.895

Required:

(i) Compute the shortfall in skilled labour hours.

(ii) Determine the optimal production mix and the number of units to be outsourced from chemist suppliers.

(iii) Maximum net profit achievable for the period based on quantities determined in (c) (ii) above.

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Question 2b

Maziwa Ltd. is a small company that specialises in buying and selling of powdered milk. The milk tins are packaged in boxes.

The company started its operations on February 2024 with a capital of Sh.4,000,000. During the past period of six months, the following transactions have occurred:

	Powdered milk purchases		Sale of powdered milk
Date of receipt	Quantity (boxes)	Total cost Sh.	Date of dispatch	Quantity (boxes)	Total sales Sh.
February 13 March 8 April 11 May 12 July 15	200 400 600 400 500	72,000 152,000 240,000 140,000 140,000	March 10 May 20 July 25	500 600 400	250,000 270,000 152,000

Additional information:

1. The closing inventory counted on 31 July 2024 was 500 boxes.

2. General operating expenses paid during the period amounted to Sh.23,000.

3. The company uses LIFO method of inventory valuation.

Required:

Prepare:

(i) A stores ledger account.

(ii) Income statement for the company for the period ended 31 July 2024.

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April 2024

1 Questions

Question 3b

Luxury Weekend County Park is an entertainment park that offers individual and family entry tickets. The tickets include a meal, three types of beverages and unlimited use of the swimming pools. Luxury Weekend County Park has the following ticket prices and variable costs for the year 2024:

Ticket class	Individual Sh.	Family Sh.	Total Sh.
Selling price per ticket	2,400	3,000
Variable cost per ticket:
Cost of meal	(740)	(800)
Direct labour	(600)	(600)
Variable cost of beverages	(240)	(250)
Swimming cost	(220)	(250)
Contribution margin	600	1,100
Apportioned annual fixed costs (Sh.)	3,375,000	4,125,000	7,500,000
Expected tickets to be sold	6,000	4,000	10,000

Additional information:

1	All the assumptions of cost volume profit (CVP) analysis are valid.
2	Total sales mix is currently generated by the two type of tickets in the following proportions: Individual 60% Family 40%

Required:

(i) Compute the weighted average contribution margin at the current sales mix assumed above.

(ii) Calculate the total number of tickets that Luxury Weekend County Park must sell to break-even.

(iii) The margin of safety in units for Luxury Weekend County Park.

(iv) Calculate the number of individual tickets and the number of family tickets that Luxury Weekend County Park must sell to break-even.

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December 2023

5 Questions

Question 1c

Jeffy Ltd. has been manufacturing and selling three textile products. The following details are available for each of the three products:

Product	Cotton Sh. per unit	Linen Sh. per unit	Polyester Sh. per unit
Direct material	350	365	255
Direct labour	480	240	210
Variable production overheads	150	115	205
Fixed production overheads	...300	...300	...300
Total cost per unit	1,280	1,020	970
Selling price	1,600	1,340	1,300
Net profit	320	320	330
Budgeted annual demand (units)	1,600	2,400	3,000

Additional information:

Each direct labour hour is charged at Sh.120 for cotton, Sh.120 for linen and Sh.70 for polyester.
The direct labour force is threatening to go on strike for two weeks. This means that only 10,100 hours will be available for production rather than the expected 20,200 hours.

Required:

If the strike goes ahead as planned, advise the management of Jeffy Ltd. on the product(s) that should be produced if profits are to be maximised.

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Question 2a

The Management Accountant of Almah Ltd. provided the following profit statement for the year ended 31 October 2023:

Revenue
Total costs
Net profit

Sh.“million”
60
(48)
12

The contribution sales ratio is 50%.

Required:

(i) Calculate the break-even sales.

(ii) Calculate the margin of safety.

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Question 2b

The management of Almah Ltd. in (a) above is considering two options with a view to increase sales in the year 2024.

These options are:

Option one: Increase sales by 30% and incur a sales promotion campaign worth Sh.5 million.

Option two: Increase sales by 20% and reduce the selling price by 10%.

Required:

Advise the management of Almah Ltd. on the better option to implement.

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Question 2c

Dimax College has been using their own van to transport students to and from college. The new principal feels this may be too expensive for the school. He suggests that the college could lease transport services from Gari Ltd. at a cost of Sh.308,000 per month.

The college accountant revealed the following information:

	Sh.
Cost of the van	7,000,000
Annual insurance	790,000
Annual repairs	440,000
Driver’s monthly salary	90,000
Annual road licence	100,000
Transport levy per annum	154,000
Scrap value of the van	1,000,000
Tyres and tubes annual cost	126,000
Inspection cost per year	10,000
Petrol cost per kilometre	154

Additional information:

1	The van is estimated to cover 40,000 km per year. It has an estimated useful life of six years.
2	A new traffic rule has been issued requiring all passenger vehicles including college vans to be fitted with speed governors and seat belts. This will cost Sh.40,000 per annum.
3	Gari Ltd.’s monthly cost of Sh.308,000 is attributed as follows:

3

Van hire
Driver’s salary
Maintenance.fee

Sh.
220,000
50,000
...38,000
308,000

Required:
(i)	Compute the cost per kilometre if the college: Uses its own transport. Hires transport services.
(ii)	Outline THREE other factors that the college might consider in choosing the best alternative

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Question 3c

Tamu Ltd. is a company located in the Eastern part of the country and manufactures juices. The company plans to establish a subsidiary in western part of the country to produce mineral water. Tamu Ltd. estimates that the subsidiary can produce 40,000,000 bottles of water in the next one year.

The cost analysis for the subsidiary yielded the following estimates:

	Sh.“000”	Percentage of total annual cost that is variable (%)
Material cost	1,936,000	100
Labour cost	900,000	70
Overhead cost	800,000	64
Administrative cost	300,000	30

Additional information:

The bottled water produced by the subsidiary will be sold by sales representatives who will receive a commission of 8% of the sales price.
The subsidiary will operate independently in terms of costs and revenue.

Required:

(i) Compute the sales price per bottle to enable management realise an estimated 10% profits on sales proceeds in the subsidiary.

(ii) Calculate the break-even point in value for the subsidiary on the assumption that the sales price is Sh.110 per bottle.

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August 2023

1 Questions

Question 3a

Urembo Lifestyles offers three different types of body grooming and fitness services. These are: salon, gym and barber shop using the same staff. Various estimates for the next year have been made as follows:

Service	Salon Sh. per client	Gym Sh. per client	Barber shop Sh. per client
Service fee	300	390	200
Variable material costs	140	180	100
Variable labour costs	60	100	50
Fixed overhead costs	90	120	40
Labour hours per client	2 hours	3 hours	1.5 hours

Additional information:

1	Total fixed cost for the next year is expected to be Sh.400,000
2	The budgeted maximum demand of clients for the next year for the services is estimated as follows: Salon............3,000.clients Gym 1,000 clients Barber shop 1,500 clients
3	Urembo Lifestyles has a maximum of 9,900 labour hours available next year

Required:

(i) If the business were to offer salon services only, calculate the break-even number of clients.

(ii) Prepare the limiting factor mix schedule to show the number of clients per service that maximises profitability.

(iii) The maximum net profit achievable based on service mix determined in (a) (ii) above.

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April 2023

1 Questions

Question 5a

Quivo Ltd. manufactures and sells a single product branded “QV”. The following information relates to product “QV” for the month of March 2023:

	Sh. per unit
Materials	800
Conversion costs (variable)	600
Selling price	2,000

Additional information:

1	The dealer’s margin is equivalent to 10% of the selling price.
2	The total fixed cost during the period was Sh.25,000,000.
3	The sales department indicates that the current sales during the period amounted to 90,000 units.
4	The production capacity utilisation is at 60%. The company has in the recent past faced an acute competition that has negatively affected the sales targets. The Marketing Manager has presented the following two options for increasing sales: Option A: Reducing sales price by 5%. Option B: Increasing dealers’ margin by 25% over the existing rate.

Required:

Recommended the option the company should adopt if the company desires to maintain the present profit.

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December 2022

1 Questions

Question 2b

Lengo Ltd. manufactures and sells two products L and G to a number of customers. The company is currently preparing its budget for the year ending 31 December 2023.

The cost, selling prices and demand units details for its two products are as follows:

Product	L Sh.	G Sh.
Selling price per unit	2,000	2,100
Variable costs per unit:
Direct material Q (Sh.25 per litre)	200	250
Direct material T (Sh.40 per litre)	400	200
Direct labour (Sh.140 per hour)	280	350
Overhead (Sh.40 per hour)	160	200
Fixed production cost per unit	400	500
Maximum sales demand for the month	Units 1,000	Units 3,000

Additional information:

The fixed production cost per unit is based upon an absorption rate of Sh.200 per direct labour hour and total annual production activity is 90,000 direct labour hours. One-twelfth ( 1 /12) of the annual fixed production cost will be incurred.
In addition to the above costs, non-production overhead costs are expected to be Sh.577,500.
During the period, the availability of material Q is expected to be limited to 31,250 litres.
It is the policy of Lengo Ltd not to hold inventory of finished goods

Required:

(i) Compute the shortfall in litres for material Q.

(ii) The optimal production mix based on priority ranking.

(iii) The net profit at optimal production mix.

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August 2022

2 Questions

Question 3a

Discuss six benefits that would accrue to a firm that uses break-even charts in making managerial decisions in its operations.

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Question 3b

NIE Social Academy conducts an entrance test for every new student whereby a final selection of 100 students is made. The entrance test consists of four key areas and is spread over four days, one examination per day. Being a community based institution, each student is charged a fee of Sh.500 for taking up the test. The following data relates to the two months in the previous holiday:

Statement of net revenue from the entrance tests
	April Sh.	May Sh.
Gross revenue (fees collected)	100,000	150,000
Costs:
Evaluation	40,000	60,000
Question booklets	20,000	30,000
Hire of hall at Sh.2,000 per day	8,000	8,000
Honoraria to chief invigilator	6,000	6,000
Supervision charges (on supervision of every 100 candidates at the rate of Sh.500 per day)	4,000	4,000
General administrative expenses	6,000	6,000
Total cost	84,000	116,000
Net Revenue	16,000	34,000

Required:

(i) Budgeted net revenue for 4,000 students.

(ii) Break-even number of candidates.

(iii) Number of candidates to be enrolled if the net income desired is Sh.200,000 in the following month.

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April 2022

1 Questions

Question 5b

Wasiri Ltd. produces 10,000 units per annum by employing 50% of the total factory capacity.

The selling price per unit is Sh.500 and the total costs are as follows:

	Sh."000"
Materials	1,000
Wages	2,000
Fixed overheads	1,000
Fixed Overheads	400
Total costs	4,400

Additional information:

Variable overheads maintains a constant ratio to the number of units produced.
The production manager is evaluating acceptance of a special offer of additional 10,000 units at a selling price of Sh.387.50 each.
The increased volume of purchases will reduce the material price by 2.5%.
The wage rates will remain constant but due to employment of new workers, there will be a drop in labour efficiency by 5% on all production.

Required:

(i) Prepare a statement showing the variation of net profits resulting from the acceptance of the order.

(ii) Advise the management of Wasiri Ltd. on whether to accept the offer.

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Pilot December 2021

1 Questions

Question 5b

The management of Kalu Ltd. has produced the following projections for the year 2022:

	Sh.
Selling price per unit	200
Variable cost per unit	120
Fixed costs	4,000,000
Number of units produced and sold	70,000

Additional information:

The management is considering the following options:

Reducing selling price by 10% to increase sales by 15%.
Reducing selling price by 20% to increase sales by 20%.

Required:

(i) Worksheet showing effects of each consideration.

(ii) The best option from the analysis.

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December 2021

2 Questions

Question 3c

Britkon Ltd. makes a single product branded "P" with a sales price of Sh.100 and a variable cost of Sh.60. Fixed costs are Sh.600,000 per annum.

Required:

(i) Assuming the taxation rate is 40%, determine the number of units to be sold to make a profit after tax of Sh.200,000 per annum.

(ii) As a result of increasing costs, the variable cost is expected to rise to Sh.65 per unit and fixed costs to Sh.700,000 per annum.

Assuming the selling price cannot be increased, determine the number ofunits required to maintain a profit of Sh.200,000 per annum.

(Ignore inflation).

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Question 3b

Summarise four assumptions of cost-volume profit (CVP) analysis.

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September 2021

2 Questions

Question 1a

Identify and explain four types of costs that are irrelevant for decision making.

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Question 5b

Wetu Ltd. makes leather purses. It has drawn up the following budget for its next financial period:

Selling price per unit	Sh.11.60
Variable production cost per unit	Sh.3.40
Sales commission	5% of selling price
Fixed production costs	Sh.430,500
Fixed selling and administrative cost	Sh.198,150
Sales	90,000 units

Required:

(i)	Margin of safety percentage.
(ii)	The marketing manager has indicated that an increase in the selling price to Sh.12.25 per unit would not affect the number of units sold provided that the sales commission is increased to 8% of the selling price. Required: Determine the new break-even point in units.

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May 2021

1 Questions

Question 1c

Lengo Ltd. manufactures three products namely; A, B and C

The following data relates to the three products:

	Product
	A Sh.	B Sh.	C Sh.
Selling price per unit	250	320	460
Production cost per unit:
Variable overheads	16	20	28
Installation labour	24	32	44
Manufacturing labour	40	55	70
Raw materials	70	110	155

Additional information:

1. Highly skilled labour is required for installation of the three products in the customer's premises. A maximum of 25,000 hours of highly skilled labour are currently available at Sh.8 per hour during the production period.

2. Fixed costs for the production period are Sh.450,000.

3. The maximum demand for Products A, B and C is 2,000 units, 3,000 units and 1,800 units respectively.

Required:

(i) The current shortfall in highly skilled labour at maximum demand.

(ii) The optimal production mix.

(iii) The resultant profit at the optimal production mix.

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November 2020

1 Questions

Question 3b

A manufacturing firm produces three products namely; X, Y and Z.

The following information relates to the production of the three products:

	Product
Details	X Sh.	Y Sh.	Z Sh.
Unit selling price	250	460	320
Variable production cost per unit:
Raw materials	70	155	110
Labour	24	44	32
Overheads	56	98	75

Additional information:

1. The total fixed production cost for the three products amounted to Sh.400,000.

2. Labour hours are currently limited to 25.000 hours paid at an hourly rate of Sh.8 during the production period.

3 The maximum demand for product X, Y and Z are 2,000 units, 1,800 units and 3,000 units respectively

Required:

(i). The current shortfall in labour hours at maximum demand.

(ii). The optimal product mix and the resultant profit.

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November 2019

1 Questions

Question 1b

Dilica Ltd. makes and sells a single product called "Delicious". It is currently operating at 80% of full capacity, producing 112,000 units per month. The total monthly costs at the current level of operation are Sh. 611,000. At 100% capacity, total monthly costs would be Sh.695,000 while fixed costs would be the same per month at all levels of capacity between 80% and 100%.

Additional information:

1. At the normal selling price of the product, the contribution to sales ratio is 60%.

2. A new customer has offered to buy 25,000 units of the product each month at 20% below the normal selling price.

3. Dilica Ltd. estimates that for every five units that it sells to this customer, it will lose one unit of its current monthly sales to other customers.

Required:

(i) The variable cost per unit of product "Delicious" and the total fixed cost per month.

(ii) The current normal sales price per unit, and the contribution per unit at this price.

(iii) Advise the management of Dilica Ltd. on whether the offer from the new customer should be accepted.

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May 2019

1 Questions

Question 2b

Pendo Ltd. makes three types of metallic doors; security, house and office which are made from the same basic materials (steel bars and iron sheets).

The standard unit costs and selling prices of the three types of doors are as provided below:

	Door type
	Security Sh.	House Sh.	Office Sh.
Direct materials:
Steel bars	3,500	1,960	4,200
Iron sheets	10,920	11,760	10,500
Direct labour:
Machining	2,100	1,400	2,660
Spraying	980	560	840
Unit selling price	24,500	26,040	26,600

Additional information:

1	The sales for the month of December 2018 are as follows:

Door type
Security
House
Office

Units
200
200
160

2	Owing to an industrial dispute, suppliers of the iron sheets have estimated that only 5,124 square metres of iron sheets are available for the period. The iron sheets cost Sh.1,000 per square metre.

Required:

Advise the management of Pendo Ltd. on the most profitable mix of the three types of doors.

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November 2018

2 Questions

Question 2a

Explain four assumptions of break-even analysis.

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Question 2b

Kuni Limited are distributors of two cooking gas cylinders; "Meko" and "13C". "Meko" weighs 6 kgs while "13C" weighs 13 kgs.

The following information relates to the company's projection for the year ending 30 June 2019:

Product "Meko"
Sales (43,800 units)	49,056
Fixed costs	(9,811.2)
Variable costs	(29,433.6)
Operating profit	2,811.2
Product "13C"
Sales (71,175 units)	142,350
Fixed costs	(79,716)
Variable costs	(42,705)
Operating profit	19,929

Required:

(i) Determine the break-even point of "meko" and "13C" in both units and shillings.

(ii) Given that customers refill "meko" three times for every two times they refill "13C", compute the composite unit contribution margin.

(iii) Determine the break-even sales in shillings assuming that "meko" and "13C" are normally purchased in the ratio of one to one.

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November 2017

1 Questions

Question 2a

XYZ Ltd. manufactures a product branded "Zed". The company has a production capacity of 1,000 units of Zed per day.

The following information relates to one unit of the product:

	Sh.
Materials	120
Labour	40
Variable overheads	40
Fixed overheads	100
Selling price	400

Required:

(i)	Calculate the Break-Even-Point (BEP) of sales at the current selling price for 1,000 units.
(ii)	The marketing manager intends to reduce the selling price by either 10% or 20% for the 1,000 units without affecting the total profit.
	Advise the marketing manager on the required sales volumes under the two options.

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May 2017

1 Questions

Question 4b

Blacky Ltd. manufactures three products namely; A, B and C. The management is reviewing the profitability of the product line.

You are given the following budgeted data relating to the company for the coming year:

Product	A	B	C
Sales (units)	100,000	120.000	80,000
	Sh. "000"	Sh. "000"	Sh. "000"
	1,500	1,440	880
Costs:
Material	500	480	240
Labour	400	320	160
Overhead	650	600	360
Total cost	1,550	1,400	760
Profit or (loss)	(50)	40	120

The management is concerned about the loss on Product A and it is considering ceasing its production and switching the spare capacity of 100,000 units to Product C.

Additional information:

All units produced are sold.
25% of the labour cost for each product is fixed in nature
Fixed administration overheads of Sh.900,000 in total have been apportioned to each product on the basis of units sold and are included in the overheads above. All other overhead costs are variable in nature.
Ceasing production of Product A would eliminate the fixed labour charge associated with it and one sixth (1/6) of the fixed administration overheads apportioned to Product A.
Increasing the production of Product C by 100,000 units would mean that the fixed labour cost associated with Product C would double, variable labour cost would rise by 20% and its selling price would decrease by Sh.1.50 in order to achieve the increased sales

Required:

Advise the management of Blacky Ltd. on whether production of Product A should cease.

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November 2016

2 Questions

Question 2c

Exam-Companion Academy (ECA) offers expert training to candidates on four subjects. The budget for the financial year ending 30 June 2017 is as follows:

		Subject area
Expected training hours Charge per hour (Sh.) Variable.cost.per.hour.(Sh.)	Accounting 2,500 400 100	Taxation 3,000 500 150	Auditing 3,500 450 90	Economics 1,000 350 100

The fixed costs for the year are expected to be Sh.1,986,000.

Required:

(i) Assuming the above mix of training hours, advise the management on total number of hours required to break-even.

(ii) The contribution from each subject and in total at break-even.

(iii) Total hours required to earn a profit of Sh.1,324,000.

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Question 3c

Rabuor Ltd. manufactures a range of products. The company absorbs production overheads using a rate of 200% of the direct wages. This rate was calculated from the following budgeted figures:

	Sh.
Variable.production.cost	6,400
Fixed production costs	9,600
Direct labour cost	8,000

The management is faced with the following decision making problems:

Problem 1

The normal selling price per unit of product EXEM is Sh.220 while the unit production cost is as follows:

	Sh.
Raw materials	80
Direct labour	40
Production.overheads	80
	200

There is a possibility of supplying a special order for 2,000 units of product EXEM at Sh.160 each. If the order is accepted, the normal budgeted sales would not be affected and the company has the necessary capacity to produce the additional units.

Problem 2

The cost of making component BEE, which forms part of product WYE is given below:

	Sh.
Raw materials	40
Direct labour	80
Production.overheads	160
	280

Component BEE could be bought from an outside supplier for Sh.200.

Fixed production costs will not be affected.

Required:

(i) Advise the mánagement on whether to accept the special order under Problem 1.

(ii) Evaluate whether the company should continue to make component BEE or buy it from an outside supplier under Problem 2.

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May 2016

2 Questions

Question 1a

The following information has been made available from the records of Keni Automotives Ltd.. a company dealing with the manufacture of spare parts:

Direct materials	Price per unit Sh.
X Y Direct wages X Y Variable.overheads Fixed overheads Selling price X Y	800 600 12.hours.at.Sh.50.per.hour 8 hours at Sh.45 per hour 150% of direct wages Sh.750,000 Sh. 2,500 2,000

The directors of the company have sought your advice on the following alternative sales mix in the budget for the next period:

I. 2,500 units of X and 2.500 units of Y.

II. 4,000 units of Y only.

III. 4,000 units of X and 1.000 units of Y.

IV. 1,500 units of X and 4.000 units of Y.

Required:

Advise the management of the company on which of the alternative sales mix you would recommend. Justify your answer.

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Question 1b

A company intends to start selling a new pair of hand held pliers in the upcoming financial year. The company wishes to establish how many hand held pliers should be sold in order to break even on this investment. The chief accountant has provided the following data:

Fixed costs	Sh.
Metal molding machine	1,000,000
Plastic grip molder	250,000
Sander	50,000
Variable cost (per unit)	Sh.
Packaging material	400
Raw materials	700
Grip metal	200
Shipping	75

Additional information:

The marketing department estimates that they could sell the new pair of hand held pliers for Sh.1,500 per unit and that projects' sales will average 16,000 units per month.
The company wishes to break even and start to earn profit within the first month.
The target profit level at the end of the first month is Sh.250,000.

Required:

(i) The number of units required to break even.

(ii) Based on the projected monthly sales, calculate the margin of safety. Comment on your answer

(iii) The number of units required to earn the target profit at the end of the first month.

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November 2015

3 Questions

Question 2b

Tarvol Ltd. manufactures and seils a single producr. The company's contribution format income statement for the year ended 31 October 2015 is given below:

.................................

Sales.(20,000.units)
Variable expenses
Contribution.margin
Fixed expenses
Net income

Total
Sh.
1,200,000
900,000
300,000
(240,000)
60,000

Per.unit
Sh.
60
45
15

Percentage.of.sales

100%
....?...
....?...

The management of the company is anxious to increase the company's profit and has asked for analysis of a number of items.

Required:

(i) Compute the company's contribution margin ratio and variable expense ratio.

(ii) Compute the company's break-even point both in units and in shillings.

(iii) Compute the increase in net operating income of the company assuming that sales will increase by Sh.400,000 in the next financial year 'and the cost behaviour patterns will remain unchanged. Use the contribution margin ratio obtained in (b) (i) above to compute your answer.

(iv) Refer to the original data. Assume that in the next financial year, the management targets the company to earn a profit of at least Sh.90,000. Compute how many units would have to be sold to meet this target profit.

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Question 5a

Highlight six assumptions of cost volume profit (CVP) analysis.

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Question 5b

Computech has two fully automated machines Mi and M2 through which metai is passed to produce stands. There are production constraints and Computech has decided to produce only one of the three stand modeis P, Q and R during the next financial year.

The forecasts for the next financial vear are as follows:

.........................................
Maximum saies (units)
Stand unit data:
Selling price (Sh.)
Machine time: M1 (hours)
Machine time: M2 (hours)

P
7,400

900
0.25
0.2

Q
10,000

800
0.15
0.225

R
12,000

1,000
0.3
0.25

Additional information:

Maximum operating hours for machine M1 is 1,700 hours while for machine M2 is 1.920 hours.
Maximum quantity of metal available amounts to 17,000 metres.
Each stand requires 2 metres of metal.
The cost of metal amounts to Sh.50 per metre.
Variable machine overheads for machine Mi and machine M2 are Sh.500 per hour and Sh.600 per hour respectively.
Production capacity is dedicated to the stands only.

Required:

Advise the management of Computech on which stand to produce and sell indicating the number of units and resulting contribution.

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Pilot September 2015

1 Questions

Question 5

Omega Manufacturers Limited has just acquired new production facilities to produce product Omega. The product will be produced in two departments, crushing and filtering.

Additional information:

1	The product will retail at a price of Sh.500 per litre.
2	Variable production costs are as follows:

.................................................
Direct materials
Direct labour
Variable production overheads

Crushing
Sh. 50
Sh. 150
Sh. 40

Filtering
-
Sh. 40
Sh. 20

3	Fixed production overheads amount to Sh.5,000,000 for both departments.
4	The Crushing department is currently operating at full capacity with available labour hours being 10,000.
5	Each unit of Omega requires 0.25 hours in the Crushing department.

Required:

(a)	(i)	Break-even point in units and revenue.
	(ii)	Margin of safety in units.
	(iii)	Current budgeted profit.

(b)	A customer has offered to purchase 2000 units of product Alpha, another product that Omega Manufacturers Limited can produce with the new production facility: Cost data is as follows for product Alpha:

(i)

Cost per unit
..................................................
Direct materials
Direct labour
Variable production overheads

Crushing
Sh. 250
Sh. 300
Sh. 50

Filtering
-
Sh. 80
Sh. 20

	(ii)	Each unit of Alpha requires 0.5 hours in crushing department.
	(iii)	The customer has offered a price of Sh.1500 per unit of Alpha.
	(iv)	Incremental fixed costs associated with the offer amount to Sh.1,000,000.
	Required: Advise the company on whether to accept the offer.

(c)	The management is considering a proposal to establish a new market in a neighbouring country for product Omega. This will require expansion of the production facility. The proposal will increase costs as follows:

Advertising expenses
Travelling expenses
Fixed.production.overheads

10% of revenue.
10%.of.prime.cost.
Sh.2,500,000

Target annual sales volume will be 10,000 units in the new market at a price of Sh.900 per unit.

Required:

Advise the company on whether it should market product Omega in the new country.

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Cost-volume profit analysis (break-even analysis)

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