Page 74 - DCOM206_COST_ACCOUNTING_II

Unit 4: Cost Volume Profit Analysis

Fixed cost Notes
Break-even Point (in `) =  Sellingpriceperunit
Contributionperunit
48,00,000
=  120
64
= ` 90,00,000
Fixedcost
Break-even Point (in units) =
Contributionperunit
48,00,000
= = 70,000 units
64

Task Cost-volume-profit relationship provides the management with a simplified
framework for an organisation which is thinking on a number of problems.” Discuss.



Caselet Ethics and a Cost-Volume-Profit Application

anna Lumus, the marketing manager for a division that produces a variety of
paper products, is considering the divisional manager’s request for a sales forecast
Dfor a new line of paper napkins. The divisional manager has been gathering data
so that he can choose between two different production processes. The first process would
have a variable cost of $10 per case produced and fixed costs of $100,000. The second
process would have a variable cost of $6 per case and fixed costs of $200,000. The selling
price would be $30 per case. Danna had just completed a marketing analysis that projects
annual sales of 30,000 cases. Danna is reluctant to report the 30,000 forecast to the divisional
manager. She knows that the first process would be labour intensive, whereas the second
would be largely automated with little labour and no requirement for an additional
production supervisor. If the first process is chosen, Jerry Johnson, a good friend, will be
appointed as the line supervisor. If the second process is chosen, Jerry and an entire line of
labourers will be laid off. After some consideration, Danna revises the projected sales
downward to 22,000 cases. She believes that the revision downward is justified. Since it
will lead the divisional manager to choose the manual system, it shows a sensitivity to the
needs of current employees—a sensitivity that she is afraid her divisional manager does
not possess. He is too focused on quantitative factors in his decision making and usually
ignores the qualitative aspects.
Required:

Compute the break-even point for each process.
Source: http://www.cengagesites.com/academic/assets/sites/3185_ch04.pdf
Self Assessment

Fill in the blanks:
5. In order to earn profit, the contribution must be more than the …………………….
6. …………………… is the composition of fixed costs plus profit.

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