Page 8 - CIMA OCS Workbook February 2019 - Day 1 Suggested Solutions

CIMA FEBRUARY 2019 – OPERATIONAL CASE STUDY

EXERCISE 3(A) – CVP ANALYSIS
Question Your response

Discuss which costs are fixed According to the budgets, variable costs consist of the
and which variable. following:
• Materials
• All direct production labour
• Variable production overheads
• Some variable selling costs
All other costs are deemed to be fixed.

It would be surprising if all direct production labour was
variable as this would mean, for example, that when there was
spare capacity in 2018, that staff wouldn’t have got paid. This
uncertainty might lead some staff to look for more security
elsewhere but we are told that Trigg has a reputation as a good
employer and staff retention is high.

It is likely that some production staff will be salaried or have
guaranteed minimum wages but, from a costing perspective, all
direct labour is treated as variable.

Determine the breakeven Assuming sales are made in constant mix, then we can use the
revenue in 2019 and the data on p20:
safety margin. • Weighted average C/S ratio = 6,297/20,940 = 30%

• Total fixed costs = 3,217 + 1,299 = 4,516k
• BEP (revenue) = fixed costs / CS ratio = 4,516/0.3 = 15,053k
or F$15.05m
• Safety margin = (20.94 – 15.05)/20.94 = 28%

Determine which products Product Price, revenue Contribution CS ratio
have the highest C/S ratios
Domestic 13,420k 3,461k 0.258
and comment on your Commercial 7,520k 2,836k 0.377
answer.
Basic tower 450 125 0.278
Basic arm 200 56 0.280
Deluxe tower 750 250 0.333
Deluxe arm 300 96 0.320
Bridge 330 87 0.358

Commercial contracts have the highest CS ratios, reinforcing
the need to grow this side of the business.

Within domestic products, the luxury versions have the highest
ratios, emphasising the importance of having a strong brand
name.

50 KAPLAN PUBLISHING