Page 7 - CIMA OCS Workbook May 2019 - Day 1 Tasks

SUGGESTED SOLUTIONS

3 DECISION MAKING

EXERCISE 3(A) – CVP ANALYSIS

Question Your response

Discuss which costs are fixed • Not given a detailed breakdown of costs.
and which variable. • Direct materials and variable OH likely to be variable
• Direct labour and fixed OH likely to be fixed or stepped
(assuming the workforce are salaried rather than paid on a
time or piece-rate system)

Determine the breakeven Calculating the C/S ratio for 2109:
revenue in 2019 and the • Budgeted contribution = 9,560 + 5,829 + 3,489 = 18,878
safety margin. • Weighted average C/S ratio = 18,878 / 38,190 = 0.494
• (Note: We have assumed here that operating expenses are
(Note: assume that direct fixed, so we can add back fixed production costs to gross
labour is a fixed cost and that profit to get contribution)
total budgeted direct labour
for 2019 is E$5,829k and total Using just production costs:
fixed production OH
E$3,489k.) • Total fixed costs = 5,829 + 3,489 = 9,318
• Breakeven revenue = 9,318 / 0.494 = 18,862
• Safety margin = (38,190 – 18,862) = 19,328 or 51%

Using total costs and assuming 2019 figures for operating
expenses are the same as for 2018:
• Total fixed costs = 5,829 + 3,489 + 4,042 = 13,360
• Breakeven revenue = 13,360 / 0.494 = 27,045
• Safety margin = (38,190 – 27,045) = 11,145 or 29%

Determine which products Product Price Contribution C/S ratio
have the highest C/S ratios Tablets - vitamins 800 395 0.494
and comment on your Tablets - minerals 700 335 0.479
answer.
Tablets - herbal 900 465 0.517
Tablets - care 1,000 535 0.535
Liquids - vitamins 1,100 622 0.565
Creams - vitamins 2,200 928 0.422
Creams - care 3,200 1,328 0.415

As far as C/S ratios are concerned, liquids > tablets > creams
This could be used (adjusted if necessary) in decision making –
for example if we have production capacity constraints.

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