May-2011, 2(b) - CVP Analysis Lisa Company is the exclusive distributor for an automative product. The product sells for Tk. 40 per unit and has a CM ratio 30%. The company's fixed expenses are Tk. 180,000 per year. Required: i) What is the variable expenses per unit? ii) Using the equation method: 1) What is the break-even point in units and sales taka? 2) What sales level in units and in sales taka is required to earn an annual profit of Tk. 60,000? 3) Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by Tk. 4 per unit. What is the Company's new break-even point in units and sales taka? iii) Repeat (ii) using the unit contribution method. Solution Answer (i) We Know, CM Ratio = Contribution / Sales => CM Ratio = (Selling Price - VC per Unit) / Selling Price => 0.30 = (40 - VC) / 40 => 12 = 40 - VC => VC = 40 - 12 => VC= 28 per Unit Answer (ii) : Equation Method 1) BEP in Units and Taka ------------------------------ We have, p = 40, v = 28 and FC = 180,000 40x = 28x + 180,000 => 40x − 28x = 180,000 => 12x = 180,000 So, Break-even in Units = x = 15,000 units Break-even Point in Sales Taka = 40 × 15,000 = 600,000 Taka. 2) Targeted Sales in Units and Taka ------------------------------------------- If Targeted Profit, P= Tk. 60,000, We have, 40x = 28x + 180,000 + 60,000 => 40x − 28x = 240,000 => 12x = 240,000 So, Break-even in Units = x = 20,000 units Break-even Point in Sales Taka = 40 × 20,000 = 800,000 Taka. 3) BEP in Units and Taka (If VC changes) ------------------------------------------------ If VC reduces by Tk. 4, We have, p = 40, v = 28-4 = 24 and FC = 180,000 40x = 24x + 180,000 => 40x − 24x = 180,000 => 16x = 180,000 So, Break-even in Units = x = 11,250 units Break-even Point in Sales Taka = 40 × 11,250 = 450,000 Taka.

Answer (iii) : Unit Contribution Method 1) BEP in Units and Taka ----------------------------- BEP in Units = Fixed Costs / Contribution Margin par Unit = Fixed Costs / (Selling Price - VC par Unit) = 180,000/ (40 - 28) = 180,000/12 = 15,000 Units. BEP in Taka = Fixed Costs / CM Ratio = 180,000/ 0.30 = 600,000 Taka. 2) Targeted Sales in Units and Taka ------------------------------------------ Targeted Sales in Units = (Fixed Costs + Targeted Profit)/ Contribution Margin par Unit = (Fixed Costs + Targeted Profit)/ (Selling Price - VC par Unit) = (180,000+60,000)/ (40 - 28) = 240,000/12 = 20,000 Units. Targeted Sales in Taka = (Fixed Costs + Targeted Profit)/ CM Ratio = (180,000+60,000)/ 0.30 = 240,000/ 0.30 = 800,000 Taka. 3) BEP in Units and Taka (If VC changes) ------------------------------------------------ BEP in Units = Fixed Costs / Contribution Margin par Unit = Fixed Costs / (Selling Price - VC par Unit) = 180,000/ [(40 - (28 - 4)] = 180,000/16 = 11,250 Units. New CM Ratio = (Selling Price - VC per Unit) / Selling Price = (40 - 24) / 40 = 0.40 BEP in Taka = Fixed Costs / CM Ratio = 180,000/ 0.40 = 450,000 Taka.

May-2011, 3(b) - Cost of Goods Manufactured Statement

Note:

Purchase of Raw Materials = Purchase + Freight In - Purchase Return - Purchase Discount = =400000+12000-3200-20000 = 388800

Manufacturing Overhead = Factory Depreciation + Factory Insurance + Other Factory Expenses = 160000+50000+16000 = 226000

Administrator

Typewritten text

Dec-2012, 2(b) : Costs of Goods Sold Statement

Dec-2012, 6(c) : Working Capital Financing

Note: Here, It is assumed that Interest is paid in advance.

2013 June - 2 (b) Income Statement

Total amount Unit cost

Sales revenue

2,520,000

Less: Cost of goods sold

Direct material, opening inventory 200,000

Purchase 675,000

Direct material, closing inventory (160,000)

Direct material consumed 715,000

Freight in 1,000

Direct manufacturing labour cost 240,000

Prime cost 956,000

Factory overhead 191,200

Total manufacturing cost 1,147,200

458.88

WIP, opening inventory -

WIP, closing inventory -

Cost of goods manufactured 1,147,200

458.88

FG, opening inventory 210,000

Cost of goods available for sale 1,357,200

FG, closing inventory (321,216)

Cost of goods sold

(1,035,984) 493.33

Gross profit

1,484,016 706.67

Less: Administrative expenses

(6,000)

Selling expenses

(12,000)

Net profit

1,466,016 698.10

2013 June - 3 (b)

(i) Variable expense per unit = 40 - (40 × 30%) = 28 (ii) BEP : In units = 180,000 / (40 - 28) = 15,000 units In sales = 180,000 / 30% = Tk. 600,000 (iii) Required sales level : In units = (180,000 + 60,000) / (40 - 28) = 20,000 units In sales = (180,000 + 60,000) / 30% = Tk. 800,000 (iv) BEP : In units = 180,000 / (40 - 24) = 11,250 units New CM ratio = 16 / 40 = 40% In sales = 180,000 / 40% = Tk. 450,000

2013 June - 5 (b)

Cash budget

Jan Feb Mar Total

Cash receipts:

From sales 16,000 24,000 27,000 67,000

From trade receivables 30,000 18,000 22,000 70,000

46,000 42,000 49,000 137,000

Cash payments:

Trade creditors 14,000 33,000 36,000 83,000

Accrued sales commission 3,500 - - 3,500

Fixed cost 3,000 3,000 3,000 9,000

20,500 36,000 39,000 95,500

Receipt over payments 25,500 6,000 10,000 41,500

Opening cash balance 7,500 33,000 39,000 7,500

Closing cash balance 33,000 39,000 49,000 49,000

2013 June - 8 (b)

Year CFBT Annual

Depreciation Profit

before tax Tax @ 35%

Cash flow after tax

Cumulative Cash flow

Discount factor

Present Value

0 (500,000) - - - (500,000) (500,000) 1.000 (500,000)

1 100,000 90,000 10,000 3,500 96,500 (403,500) 0.870 83,955

2 150,000 90,000 60,000 21,000 129,000 (274,500) 0.756 97,524

3 200,000 90,000 110,000 38,500 161,500 (113,000) 0.658 106,267

4 225,000 90,000 135,000 47,250 177,750 64,750 0.572 101,673

5 350,000 90,000 260,000 91,000 259,000 323,750 0.497 128,723

Net present value 18,142

Payback period = 3 years + (113,000 / 177,750) years = 3 years 7 months 19 days NPV = BDT 18,142

Profitability index = 96,500 + 129,000 + 161,500 + 177,750 + 259,000

= 1.04 500,000

Comment: The invested money is expected to be returned within 3 years 7 months 19 days and the project has a positive NPV for the entire life which results in PI more than 1. So, the project can be taken up.

2013 December – 2(c)

Direct material, opening inventory -

Purchase 140,000

Direct material, closing inventory (1,386)

Direct material consumed 138,614

Direct manufacturing labour cost 30,000

Prime cost 168,614

Factory overhead:

Plant energy cost 5,000

Indirect manufacturing labour cost (V) 10,000

Indirect manufacturing labour cost (F) 16,000

Other indirect manufacturing labour cost (V) 8,000

Other indirect manufacturing labour cost (F) 24,000

Total manufacturing cost 207,614

WIP, opening inventory -

WIP, closing inventory -

Cost of goods manufactured 207,614

FG, opening inventory -

Cost of goods available for sale 207,614

FG, closing inventory (20,970)

Cost of goods sold 186,644

Income statement Revenue 436,800 COGS (186,644)

GP 250,156 Distribution cost (162,850) Administrative cost (50,000)

Net Operating Income 37,306

Total units produced = 100,000 RM required (100,000*2) 200,000 RM closing inventory 2,000 Direct material inventory cost = 140000/202000*2000 = 1386

Total variable manufacturing cost 167,614 Total units produced 100,000 Per unit manufacturing cost 1.68 FG, closing inventory cost 20,970 FG, closing inventory units 12511 Units sold (100,000-12,511) 87,489 Sales revenue 436,800 Unit selling price 5

Dec-2013, 3(c) – CVP Analysis By – Kawser Hossain

(i) CM Ratio & Variable Expense Ratio: We have, Contribution Margin= 112,500; Sales= 5000*50 = 250,000 So, CM Ratio= CM/Sales*100 = (112,500/250,000)*100 = 45% And, Variable Expense Ratio= 100% - CM Ratio = 100%-45% = 55% (ii) BEP in units and sales Taka BEP in Sales Tk = Fixed cost/CM Ratio = {(Sales*CM Ratio)-profit}/ 45% = {(250,000*45%)-22,500}/0.45 = (112,500-22,500)/0.45 = 90,000/0.45 = 200,000 BEP in Units = BEP in Sales TK/ Unit Selling Price = 200,000/50= 4000 units (iii) Change in Income We have, FC= 90,000, Total Sales= 250,000+40,000 = 290,000 VC= 290,000*55% = 159,500 We Know, Profit = Total Sales- FC-VC => Profit = 290,000- 90,000- 159,500 = 40,500 Change in Net Income= 40,500-22,500 = 18,000.

Dec-2013, 5(c) – Cash Flow Statement By – Kawser Hossain

Taka Taka Taka Taka

Net cash flow from operating Activities

Net Income 84000

Adjustments:

(+) Depreciation Expense 18000

(+) Loss on sale of Equipment 1000

(+) Decrease A/c Receivable 3000

(-) Increase M Inventories (10000)

(+) Decrease prepaid expense 2000

(-) Decrease A/c Payable (8000)

(+) Increase Income T Payable 12000

(-) Increase Acc Exp. Payable (5000)

13000

Net Cash Flow from O A 97000

Cash Flow from Investing Activities

Purchase Equipment (180000)

Sale on Equipment 17000

Net Cash Flows from I A (163000)

Cash Flow from Financing Activities

Bonds Issued 1300000

Bonds paid (32000)

Net Cash Flow from F A 98000

Net Increase /Decrease 32000

Cash beginning 159000

Cash Ending 191000

** Cash Flow from non-operating & non-financing Common stock of Tk 60,000/- was issued to acquire land.

December-2013, 8(c) Leasing vs Borrowing (Buying)

PV of Cash Outflows under Leasing Alternative:

Year-end Lease

Payments Tax Benefit

@50% Cash

Outflows

PV Factor @7%

PV of Cash outflow

0 220,000 220,000 1.0000 220,000

1-4 220,000 110,000 110,000 3.3872 372,593

5 110,000 -110,000 0.7130 -78,428

514,165

PV of Cash Houtflows under Buying Alternative: Instalment = Loan Amount / PV Annuity Factor @14% [considering beginning of the period] = 10,00,000 / 3.9137 = 255,513

Year-end Loan

Instalment Beginning Balance

Interest Principal Ending Balance

0 255,513 1,000,000 255,513 744,487

1 255,513 744,487 104,228 151,284 593,203

2 255,513 593,203 83,048 172,464 420,739

3 255,513 420,739 58,903 196,609 224,129

4 255,513 224,129 31,378 224,135 -5

Depreciation = (Cost - SV)/ No of years = (1000000 - 0) / 5 = 200000

Year-end

Loan Instalment

Interest @14%

Depr Tax

Deductable Expenses

Tax Benefit @50%

Net Cash outflow

PV Factor @7%

PV of Cash outflow

0 255,513 - - 255,513 1.0000 255,513

1 255,513 104,228 200,000 304,228 152,114 103,399 0.9346 96,634

2 255,513 83,048 200,000 283,048 141,524 113,988 0.8734 99,562

3 255,513 58,903 200,000 258,903 129,452 126,061 0.8163 102,903

4 255,513 31,378 200,000 231,378 115,689 139,824 0.7629 106,671

5 - 200,000 200,000 100,000 -100,000 0.7130 -71,299

589,984

The company is advised to go for leasing as PV of cashflows under leasing alternative (514,165) is lower than that under buying alternative (589,984).