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    BMC Limited: Calculation of Fixed Elements of Each Component Costs

    Uploaded by

    Humphrey Osaigbe
    The document calculates various costs and revenues for two production levels, 6,000 and 8,000 units, to determine break-even point. It separates total costs into fixed and variable components. It then calculates contribution margin, break-even point in units and sales, margin of safety, units required to make a profit of $10,000, and sales required to make a $8,000 profit after 30% taxes. It also lists limitations and assumptions of break-even analysis.

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    BMC Limited: Calculation of Fixed Elements of Each Component Costs

    Uploaded by

    Humphrey Osaigbe
    30 views6 pages
    The document calculates various costs and revenues for two production levels, 6,000 and 8,000 units, to determine break-even point. It separates total costs into fixed and variable components. It then calculates contribution margin, break-even point in units and sales, margin of safety, units required to make a profit of $10,000, and sales required to make a $8,000 profit after 30% taxes. It also lists limitations and assumptions of break-even analysis.

    Original Description:

    Answer to CVP Analysis

    Original Title

    BMC Ltd

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    © © All Rights Reserved

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    The document calculates various costs and revenues for two production levels, 6,000 and 8,000 units, to determine break-even point. It separates total costs into fixed and variable components. It then calculates contribution margin, break-even point in units and sales, margin of safety, units required to make a profit of $10,000, and sales required to make a $8,000 profit after 30% taxes. It also lists limitations and assumptions of break-even analysis.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    30 views6 pages

    BMC Limited: Calculation of Fixed Elements of Each Component Costs

    Uploaded by

    Humphrey Osaigbe
    The document calculates various costs and revenues for two production levels, 6,000 and 8,000 units, to determine break-even point. It separates total costs into fixed and variable components. It then calculates contribution margin, break-even point in units and sales, margin of safety, units required to make a profit of $10,000, and sales required to make a $8,000 profit after 30% taxes. It also lists limitations and assumptions of break-even analysis.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    of 6

    BMC LIMITED

    6,000 8,000
    $ $
    Material 18,000.00 3.00 24,000.00 3.00 Variable Cost since it is fixed per unit but varies in total
    Labour 15,000.00 2.50 19,000.00 2.38 Mixed Cost since it varies per unit and also varies in total
    Overheads 11,700.00 1.95 14,700.00 1.84 Mixed Cost since it varies per unit and also varies in total
    44,700.00 57,700.00
    Selling Price 8.00 8.00

    OPERATING STATEMENT
    $ $
    Total Sales 48,000.00 64,000.00
    Total Cost 44,700.00 57,700.00
    Total Profit 3,300.00 6,300.00

    a. Calculation of Fixed Elements of Each Component Costs


    Step 1 Calculation Variable Labour Cost/Unit
    Low High Change
    Labour $15,000.00 $19,000.00 $4,000.00
    Activity Level 6,000 8,000 2,000.00

    Variable Labour Cost/ Unit (b) $2.00

    Step 2 Separation of Fixed Labour Cost from Mixed Costs at High Level of Activity
    Total Cost = Fixed Cost + Variable Cost
    Y = a + b(x)
    Total Labour Cost/ Unit = Fixed Cost Variable Cost
    $19,000.00 = Fixed Cost + $2(8,000)
    Fixed Cost = $19,000 - $16,000
    Fixed Labour Cost $3,000

    Step 3 Calculation Variable Overhead Cost/Unit


    Low High Change
    Overheads $11,700.00 $14,700.00 $3,000.00
    Activity Level 6,000 8,000 2,000.00

    Variable Overhead Cost/ Unit (b) $1.50

    Step 4 Separation of Fixed Overhead Cost from Mixed Costs at High Level of Activity
    Total Cost = Fixed Cost + Variable Cost
    Y = a + b(x)
    Total Overhead Cost = Fixed Cost Variable Cost
    $14,700.00 = Fixed Cost + $1.5(8,000)
    Fixed Cost = $14,700.00 - $12,000
    Fixed Labour Cost = $2,700

    b. Calculation of Total Fixed Cost


    Total Fixed Cost = Total Fixed Labour Cost + Total Fixed Overhead Cost
    Total Fixed Cost = $3,000 + $2,700
    Total Fixed Cost = $5,700

    c. Calculation of Contribution/ Unit


    Contribution/ Unit = Selling Price - Variable Cost/Unit
    Variable Cost/Unit = Variable Material Cost + Variable Labour Cost + Variable Overhead Costs
    Variable Cost/Unit = $3.00 + $2.00 + $1.50
    Variable Cost/Unit = $6.50
    Contribution/ Unit = $8.00 - $6.50
    Contribution/ Unit = $1.50

    d. Calculation of C/S Ratio


    Contribution
    C/S Ratio =
    Sales/Selling Price
    $1.50
    $8.00
    C/S Ratio = 18.75%

    e. Calculation of Break-Even in Units and in Values


    i. Calculation of Break-Even in Units
    Total Fixed Cost
    Break-Even in Units =
    Contribution/Unit
    $5,700.00
    Break-Even in Units =
    $1.50
    Break-Even in Units = 3,800

    ii. Calculation of Break-Even in Values


    Total Fixed Cost
    Break-Even Sales =
    C/S Ratio
    $5,700.00
    Break-Even Sales =
    0.1875
    Break-Even Sales = $30,400

    f. Calculation of Margin of Safety (MOS)


    i. Margin of Safety (MOS) in Units = Total Output - Break Even Output
    8,000 - 3,800
    Margin of Safety (MOS) in Units = 4,200

    ii. Margin of Safety (MOS) in Value = Total Revenue - Break Even Revenue
    = $64,000 - $30,400
    = $33,600
    g. No. of Units to be sold to make a profit before tax of $10,000
    Units to be sold to make a targeted profit before tax
    Total Fixed Cost + Targeted Profit
    =
    Contribution/Unit

    $5700 + $10000
    =
    $1.50
    $15,700
    =
    $1.50
    = 10,467

    h. Total Sales required to make a profit after tax of $8,000 assuming a company tax rate of 30%

    =[(𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡+((𝑇𝑎𝑟𝑔𝑒𝑡𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑇𝑎𝑥)/


    Total Sales in Unit to achieve a Targeted (1 −𝑇𝑎𝑥 𝑅𝑎𝑡𝑒)))/(𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛/𝑈𝑛𝑖𝑡)]^
    Profit of N8,000 after tax

    =[($5,700+($8,000/(1 −0.30)))/
    $1.50]^

    Units to be sold = 11,419

    =[(𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡+((𝑇𝑎𝑟𝑔𝑒𝑡𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑇𝑎𝑥)/


    (1 −𝑇𝑎𝑥 𝑅𝑎𝑡𝑒)))/(𝐶/𝑆𝑅𝑎𝑡𝑖𝑜)]^
    Total Sales in Value to achieve a
    Targeted Profit of N8,000 after tax

    =[($5,700+($8,000/(1
    −0.30)))/0.1875]^

    = $91,352

    i. Limitations of Break-Even Analysis


    i. All other variables does not remain constant in real life.
    ii. Companies often have varieties of product rather than single product or constant sales mix.
    iii. Total costs and total revenue in real life does not necessary behave in a linear functions to output.
    iv. Profits in real life are based of full costing approach.
    vi. CVP analysis is irrelevant beyond the relevant range.
    vii. CVP analysis is applicable only to a short-term time horizon, rather fixed cost must be recovered in the long run.

    i. Assumptions of Break-Even Analysis


    i. All other variables remain constant.
    ii. A single product or constant sales mix.
    iii. Total costs and total revenue are linear functions of output.
    iv. Profits are calculated on a variable costing basis.
    v. Costs can be accurately divided into their fixed and variable elements.
    vi. The analysis applies only to the relevant range.
    vii. The analysis applies only to a short-term time horizon.
    it is fixed per unit but varies in total
    varies per unit and also varies in total
    varies per unit and also varies in total
    head Cost

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