CAP1 MANAGEMENT ACCOUNTING

SESSION 2

SOLUTIONS

CAP1 Management Accounting 2016/2017

© Chartered Accountants Ireland
 Contents
Solution to Question 1 Autumn 2002 Prof 2 ....................................................................... 3
Solution to Question 2 Summer 2001 .................................................................................. 4
Solution to Question 3 Autumn 1999 Prof 2 ....................................................................... 4
Solution to Question 4 Summer 2004 Prof 2 ...................................................................... 5
Solution to Question 5 Jantex Ltd......................................................................................... 6
Solution to Question 6 CAP1 Summer 2008 ...................................................................... 7
Solution to Question 7 Q.3 CAP1 Autumn 2008 .............................................................. 11
Solution to Question 8 Summer 2010 ................................................................................ 12
Solution to Question 9 Connect Ltd ................................................................................... 14
Solution to Question 10 Autumn 2012 ............................................................................... 16
Solution to Question 11 Summer 2011 .............................................................................. 17
Solution to Question 12 Autumn 2009 ............................................................................... 19
Solution to Question 13 Summer 2012 .............................................................................. 20
Solution to Question 14 Summer 2013 .............................................................................. 21
Solution to Question 15 Summer 2014 .............................................................................. 23

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 Cost Volume Profit Analysis

Solution to Question 1 Autumn 2002 Prof 2

(a) Calculate the budgeted profit for 2017 based on the Budgeted Sales

Revenue Alpha (1.50 X 50,000) 75,000

Beta (1.80 X 50,000) 90,000
165,000
Less Variable Costs
Alpha (0.70 X 50,000) ( 35,000)
Beta (1.50 X 50,000) ( 75,000)
Contribution 55,000
Less Fixed Costs (38,500)
Profit 16,500

(b) Calculate the breakeven point in €/£ and state the number of units of each product this represents
for the budgeted sales mix

When calculating the breakeven for a particular sales mix we need to calculate a weighted average
contribution for the given sales mix:

Alpha Contribution (1.50 – 0.70) 0.80 X ½ 0.40

Beta Contribution (1.80 – 1.50) 0.30 X ½ 0.15
Weighted Contribution 0.55

Breakeven Formula: Fixed Costs / Contribution per unit

38,500 / 0.55 = 70,000

Alpha 35,000 units X 1.50 52,500

Beta 35,000 units X 1.80 63,000 115,500

(c) Calculate the Margin of Safety based on the budgeted sales volume and the budgeted sales mix.
Margin of Safety = (Budgeted Sales – Breakeven Sales) / Budgeted Sales
(100,000 – 70,000) / 100,000 =
30,000 / 100,000 = 30%

(d) Calculate the breakeven point in € and state the number of units of each product this represents
for the sales mix of 4 units of Alpha to 1 unit of Beta

When calculating the breakeven for a particular sales mix we need to calculate a weighted average
contribution for the given sales mix:

Alpha Contribution (1.50 – 0.70) 0.80 X 4/5 0.64

Beta Contribution (1.80 – 1.50) 0.30 X 1/5 0.06
Weighted Contribution 0.70

Breakeven Formula: Fixed Costs / Contribution per unit

38,500 / 0.70 = 55,000
Alpha 55,000 units X 80% X 1.50 66,000
Beta 55,000 units X 20% X 1.80 19,800 85,800

(e) Comment on which if the two sales mixes referred to above is preferable.
The preferable sales mix is selling 4 units of alpha to 1 unit of Beta. The reason for this is:
 Under this selling mix we are selling more of the products with the higher contribution per unit
 Lower breakeven point.

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 Solution to Question 2 Summer 2001
(a) Calculate the total contribution earned by each product and their combined total contributions,
based on the budgeted sales volume.

Product A B Total
Revenue 2,400,000 3,200,000 5,600,000
Variable costs (1,200,000) (1,600,000) (2,800,000)
Contribution 1,200,000 1,600,000 2,800,000

(b) Calculate the breakeven point for the company in terms of sales revenue, based on the budgeted
sales mix

A: (40 – 20) X 60% 12.00

B: (80 – 40) X 40% 16.00
Weighted Contribution 28.00

Breakeven Point: Fixed Costs / Contribution per unit

999,992 / 28.00 = 35,714 units

Breakeven Revenue
A : 35,714 units X 60% X 40 = 857,136
B: 35,714 units X 40% X 80 = 1,142,848
Breakeven Revenue 1,999,984

(c) A: 35,714 X 60% = 21,428 units

B :35,714 X 40% = 14,286 units

(d) Explain Margin of Safety

Margin of safety provides management with an indication of the level by which sales would have to
fall in order to reach the breakeven point. The higher the margin of safety the greater the likelihood
that the product or sales mix will be profitable. If the margin of safety is low a small change in demand
for the product could result in the company making a loss.

(e) Calculate the margin of safety as a percentage of budgeted sales revenue, based on the budgeted
sales mix.

(Budgeted Sales – Breakeven Sales) / Budgeted Sales

(5,600,000 – 1,999,984) / 5,600,000 =
3,600,016 / 5,600,000 = 64.29%

(f) Assumptions of CVP – Any five of the following:

 All other variables remain constant.
 A single product or constant sales mix.
 Complexity related fixed costs do not change.
 Profits are calculated on a variable costing basis.
 Total costs and total revenue are linear functions of output.
 The analysis applies to the relevant range only.
 Costs can be accurately divided into their fixed and variable elements.
 The analysis only applies to the short term.

Solution to Question 3 Autumn 1999 Prof 2

(i) Selling Price based on company’s current policy
Material 2 Kg X 10 20.00
Labour 10mins @ €90 per hour 15.00
Overhead 10 mins @ €30 per hour 5.00
Variable Costs 40.00

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 In the question we are told that the product has a contribution to sales ratio of 33 1/3%. The
contribution to sales ratio is calculated as follows:

Contribution per unit / Selling Price per unit

Contribution = Selling Price – Variable Cost

If the Contribution to sales ratio is 33 1/3% of the selling price then the variable costs must be 66
2/3% of the selling price. Based on the information we have calculated above we can calculate the
selling price, 40 / 66.67% = 60.
Contribution is 20 (60 – 40)

(ii) Breakeven point in terms of both units and revenue

Fixed Costs / Contribution per unit
300,000 / 20 = 15,000 units

Revenue: 15,000 X 60 = €/£900,000

(iii) Margin of safety on the basis of budgeted sales

(Budgeted Sales – Breakeven Sales) / Budgeted Sales
(18,000 – 15,000) / 18,000 = 3,000 / 18,000 = 16.67%

(b) Limitation of CVP

 All other variables remain constant.
 A single product or constant sales mix.
 Complexity related fixed costs do not change.
 Profits are calculated on a variable costing basis.
 Total costs and total revenue are linear functions of output.
 The analysis applies to the relevant range only.
 Costs can be accurately divided into their fixed and variable elements.
 The analysis only applies to the short term.

Solution to Question 4 Summer 2004 Prof 2

(a) (i) Breakeven point in €/£ and units
Breakeven Point in Sales Revenue = Total Fixed Costs / Contribution Margin Ratio

Contribution Margin ratio = Contribution per unit / Sales Revenue per unit
(200 – 120) / 200 = 40%

Breakeven Point in Sales Revenue: 8,000,0000 / 0.40 = €/£20,000,000

Breakeven in Units: 8,000,000 / 80 = 100,000 units

(ii) Operating Profit of 200,000 units sold

Revenue (200,000 units X 200) 40,000,000
Less Variable Cost (200,000 units X 120) (24,000,000)
Contribution 16,000,000
Less Fixed Costs (8,000,000)
Operating Profit 8,000,000

(iii) Percentage change in variable costs before company make loss

Profit / units = 8,000,000 / 200,000 = 40 per unit
Change per unit / Current cost per unit = 40 / 120 = 33⅓%

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 (iv) Breakeven units if both products sold
Product Existing Product New Product

Selling Price 200.00 300.00

Variable Costs (120.00) (140,00)
Contribution 80.00 160.00

% of Sales 65% 35%

Weighted Contribution 52.00 56.00 108.00
(80 X 65%) (160 X 35%) (52 + 56)

Breakeven in Units: 12,000,000 / 108 = 111,111 units

Executive 111,111 units X 65% = 72,222 units
Supreme 111,111 units X 35% = 38,889 units

Solution to Question 5 Jantex Ltd

(a) Breakeven Point
Fixed Costs / Contribution per unit : 5,000,000 / (90 – 40) = 100,000 units
Breakeven Revenue 100,000 units X €90 = €9,000,000

(b) Graph

9m

5m

50,000 100,000 150,000

Units

(c) (i) Profit if 130,000 jackets sold

Revenue (90 X 130,000 units) 11,700,000
Variable Costs (40 X 130,000 units) ( 5,200,000)
Fixed Costs ( 5,000,000)
Profit 1,500,000

(ii) Percentage Fixed Costs can change before loss making

1.5m / 5.0m = 30%

(iii) How many jackets need to be sold to make a profit of £/€3,000,000

(Fixed Cost + Target Profit) / Contribution per unit
(5,000,000 + 3,000,000) / 50 = 160,000 units

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 Part(d)
Existing Jacket New Jacket
Selling Price 90 150
Variable Cost (40) (65)
Contribution 50 85
% of total Sales 75% 25%
Weighted Contribution 37.50 21.25
(50 X 75%) (85 X 25%)

Weighted Contribution 37.50 + 21.25 = 58.75

Breakeven Units: (5,000,000 + 2,000,000) / 58.75 = 119,148 units

Existing Jacket : 119,148 X 75% = 89,361 units
New Jacket : 119,148 X 25% = 29,787 units
Breakeven in revenue
Existing Jacket [89,361 units x €/£90] €/£8,042,490
New Jacket [29,787 units x €/£150] €/£4,468,050

Solution to Question 6 CAP1 Summer 2008

(a)(i) Calculation of breakeven point in sales revenue and in units, margin of safety in units and
budgeted after tax profit

(w1) Contribution per unit

MP3 player
(€/£) (€/£)
Sales price (unit) 150.00
Less variable costs (unit)
Direct materials 45.00
Direct labour 30.00
Direct expenses 5.00
Commission costs (150 X 4%) 6.00
86.00
Contribution per unit 64.00

(w2) Fixed costs total

(€/£)
Production overheads 267,000
Selling and office expenses 165,000
432,000

(w3) Contribution to Sales ratio (CS ratio)

(€/£)
Contribution per unit 64.00 x 100 = 42.67% approx..
Selling price per unit 150.00

Breakeven in units
(€/£)
Fixed costs 432,000 = 6,750 units
CPU 64.00

Breakeven in sales revenue (€/£)

Fixed costs 432,000 = £1,012,500 approx.
CS ratio 42.67%

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 Margin of safety in units
Actual sales – Breakeven sales 8,000 – 6,750 = 1,250 units

Profit after tax on a volume of 8,000 units

Contribution (€/£) per unit 64.00
Budget volume (units) 8,000

(€/£)
Total budgeted contribution 512,000
Less fixed costs 432,000
Budgeted profit before tax 80,000
Tax @ 25% on profits (20,000)
Profit after tax 60,000

(a)(ii) Calculation of breakeven point in units and budgeted after tax profit taking into account new
estimates

Revised contribution per unit

MP3 player
(€/£) (€/£)
Sales price (unit) – increased by 5% 157.50
Less variable costs (unit)
Direct materials – increased by 15% 51.75
Direct labour – increased by 15% 34.50
Direct expenses – same 5.00
Commission costs – 4% of sales price 6.30
97.55
Contribution per unit 59.95

Contribution to Sales ratio (CS ratio)

(€/£)
Contribution per unit 59.95 x 100 = 38.06% approx..
Selling price per unit 157.50

Revised fixed costs total

(€/£)
Production overheads – same 267,000
Selling and office expenses – increased by 5% 173,250
440,250

Revised breakeven in units

(€/£)
Fixed costs 440,250 = 7,344 approx.
CPU 59.95

Profit after tax on a volume of 7,800 units

Contribution (€/£) per unit 59.95
Budget volume (units) 7,800

(€/£)
Total budgeted contribution 467,610
Less fixed costs 440,250
Budgeted profit before tax 27,360
Tax @ 25% on profits (6,840)
Profit after tax 20,520

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 (a)(iii) Calculation of the sales price per unit so that after tax profits would equal £18,000
(€/£)
Profit after tax 18,000
Tax (18,000 X 25/75) 6,000
Profit before tax 24,000
Fixed costs 440,250
Required budgeted contribution 464,250

Required budgeted contribution (€/£) 464,250

Budgeted volume (units) 7,800

Required contribution (€/£) per unit 59.52

(€/£)
Required contribution (€/£) per unit 59.52
Previous adjusted variable costs (97.55 – 6.30) 91.25
150.77
Commission Charge (150.77 X 4/96) 6.28
Sales Price 157.05

OR
Previously calculated variable costs excluding sales commission (97.55 – 6.30) 91.25 [The
commission will be equal to 4% of whatever the new selling price is]

Let Selling Price = SP

7,800 (SP – 91.25 -.04SP) – 440,250 = 24,000

7,800 SP – 711,750 – 312SP – 440,250 = 24,000
7,488 SP = 1,176,000
SP = 157.05

(a)(iv) Calculation of expected profit and advise on making a loss based on probability estimates

Calculation of expected sales units

Sales Probability Expected
Units Sales units
6,000 0.1 600
6,500 0.2 1,300
7,500 0.4 3,000
8,500 0.3 2,550
Total 7,450

Profit after tax on expected volume of 7,450 units

Contribution (€/£) per unit – original 64.00
Budget volume (units) 7,450

(€/£)
Total expected contribution 476,800
Less fixed costs – original 432,000
Expected profit before tax 44,800
Tax @ 25% on profits (11,200)
Expected profit after tax 33,600

Break-even is 6,750 units therefore probability of making a loss = 0.1+ 0.2 = 0.3

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 (b) Fixed and variable costs

The statement is best answered using total cost and unit cost graphs. Variable costs are fixed but
only in the per unit graph. For example, variable costs like materials are fixed at say €/£5 per unit but
when activity is taken into account then they move upwards or downwards. 100 units of activity
means €/£500 total cost and 500 units of activity equal €/£2,500.

Total Variable costs Variable costs per unit

Activity
Fixed costs on the other hand are indeed fixed but only when the total for the period is taken into
account. For example, rent is fixed at €/£1,000 per period. No matter how many units of production is
produced and sold the rent is still going to be €/£1,000. However, if we look at the unit fixed cost then
it is a variable figure as the more production is divided into this fixed amount the less the unit fixed
cost is. With each changing activity the fixed cost varies upwards or downwards. Progressively the
decrease will get smaller as each unit of activity increases.

Also over time even fixed costs change. Rent for period 1 may be €/£1,000 but in period 2 it may rise
to €/£1,200. Therefore over time even fixed costs are variable.

Total Fixed costs Fixed costs per unit

In conclusion there is nothing wrong with the statement. What must be understood is the context the
statement is made in.

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 Solution to Question 7 Q.3 CAP1 Autumn 2008
(a) Net sales price per book = €/£ 30 - €/£ 9 = €/£ 21
Royalty per book = €/£ 21 x 15% = €/£ 3.15

(i) Fixed costs = €/£500,000 + €/£3,000,000 = €/£3,500,000

Variable costs = production costs + royalty + bookshop margin
= €/£4.00 + €/£3.15 + €/£9.00 = €/£16.15

Contribution = €/£30.00 - €/£16.15 = €/£13.85

Break-even = €/£3,500,000/€/£13.85 = 252,708 copies approx..

(ii) To achieve operating profit of €/£2,000,000 use target profit formula i.e.

(Fixed costs + target profit) / Contribution/unit

= (€/£3,500,000 + €/£2,000,000) / €/£13.85 = 397,112 copies (approx..)

(b) (i) 1. This would change bookshop margin to (€/£30 x 20%) €/£6.00 and the royalty to ((€/£ 30
- €/£ 6) x 15%) €/£3.60

Variable costs = production costs + royalty + bookshop margin

= €/£4.00 + €/£3.60 + €/£6.00 = €/£13.60

Contribution = €/£30.00 - €/£13.60 = €/£16.40

Break-even = €/£3,500,00 / €/£16.40 = 213,415 units (approx..)

(i) 2. This would change bookshop margin to (€/£40 x 30%) €/£12.00 and the royalty to ((€/£ 40 -
€/£ 12) x 15%) €/£4.20

Variable costs = production costs + royalty + bookshop margin

= €/£4.00 + €/£4.20 + €/£12.00 = €/£20.20
Contribution = €/£40.00 - €/£20.20 = €/£19.80

Break-even = €/£3,500,00 / €/£19.80 = 176,768 units (approx.)

(ii) The first change reduces the break-even point by 15.5% and the second change
reduces it by 30% so that the break-even point is more sensitive to increasing the
selling price.

(c) Under the original proposal in part (a) above Grisley receives:
€/£3,000,000 + €/£3.15X where X is the number of copies sold

Under the alternative proposal Grisley receives:

(€/£30 x 20%) €/£6X where X is the number of copies sold

To be indifferent these should be equal i.e.

€/£3.15X + €/£3,000,000 = €/£6X
2.85X = 3,000,000
X = 1,052,632 copies (approx.)

(d) Break-even analysis relies heavily upon the assumptions that the variable cost per unit is
constant, so that the total variable costs are a straight line, and also that fixed costs are constant.
The concept of “relevant range” suggests that such assumptions are reasonable within a relatively
small range of output levels but that outside this range the assumptions may be suspect i.e. the
variable cost line may be non-linear and fixed costs may change in accordance with the cost
functions of the economists.

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 Solution to Question 8 Summer 2010
Analysis of Costs -
Variable and Fixed €/£ FIXED COSTS €/£
VARIABLE COSTS
Printing 5.00 Development 10,000
Sales commission 1.50 Copy editing 6,000
Royalties 3.00 Selling and promotion 7,500
Bookshop discount 6.00 Typesetting 20,000
15.50 43,500

Contribution per unit €/£

Selling price per unit 30.00
Less Variable cost per unit (15.50)
Contribution 14.50

(a)(i) Break-even (units) €/£

Fixed costs 43,500
CPU 14.50
B/E units 3,000

(a)(ii) Break-even (revenue)

B/E(units) x Selling price p.u. B/E units 3,000 X €/£ 30.00 = €/£90,000

(a)(iii) Sales units to get a target profit €/£25,375

FC + Target profit
CPU €/£
43,500 + 25,375 = 4,750 units
14.50

Proof: €/£
Sales 4,750 x €/£30 142,500
Less V Costs 4,750 x £15.50 73,625
Contribution 68,875
Less Fixed Costs 43,500
Net profit 25,375

(b) Require 25% return on sales:

The variable costs that are a percentage of selling price will be different for each selling price
Current variable costs are €5 + (35% of selling price)
Profit margin required is 25% of revenue/sales
Output level would remain at 5,000 units

Let selling price = SP

5,000 (SP - 5 - .35SP) – 43,500 = 5,000(.25SP)

5,000SP – 25,000 – 1,750SP -43,500 = 1,250SP
5,000SP – 1,750SP – 1,250SP = 25,000 + 43,500
2,000SP = 68,500
SP = €/£34.25

OR ALTERNATIVE METHOD

The variable costs that are a percentage of selling price (35%) will be different for each selling price.
Therefore these VC of 35% + margin of 25% must equal 60% of the sales value
This means that the other costs of printing and binding of (5,000 units x 5) 25,000 + fixed costs of
43,500 must equal 40% of the sales value
Sales value required (25,000 + 43,500)/40% = €/£171,250
Selling price per unit required = 171,250/5,000 units = €/£34.25

(4 marks)
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 (c)(i) Break-even (units)
Variable Printing and binding costs of €/£5 disappear and the Fixed costs per edition increase by
€/£10,000
Impact on costs: Variable costs decrease from €/£15.50 to €/£10.50
Fixed costs increase by €/£10,000 to €/£53,500

Revised Contribution per unit

€/£
Selling price per unit 30.00
Less Variable cost per unit 10.50
Contribution 19.50

€/£
Fixed costs 53,500
CPU 19.50
B/E units (approx..) 2,744

This is a decrease of 256 units (3,000 – 2,744)

(2 marks)

(c)(ii) Indifferent when profits equal i.e.

Fixed cost/variable cost alternative
10,000 /5 = 2,000 units

(d)(i) Profits at 6,000 and 8,000 units under current and printing options:

Original cost structure Revised cost structure

6,000 8,000 6,000 8,000
€/£ €/£ €/£ €/£
Sales 180,000 240,000 180,000 240,000
Less V Costs 93,000 124,000 63,000 84,000
Contribution 87,000 116,000 117,000 156,000
Less F. Costs 43,500 43,500 53,500 53,500
Net profit 43,500 72,500 63,500 102,500

(d)(ii) The increase in profits for the current cost structure is €/£29,000 (72,500 – 43,500) whereas the
increase with the acceptance of the printing proposal is €/£39,000 (102,500 – 63,500). The difference
is due to the different cost structure and can be measured using the concept of operating leverage. In
essence when there are a higher proportion of fixed costs then the increase in profits as a result of an
increase in sales will be higher.
(2 marks)

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 Solution to Question 9 Connect Ltd

(a)

Sales 168,000
Less Variable Costs

Material 42,000
Labour 48,000
Production Overhead 9,600
Selling Expenses 18,000

Total Variable Costs (117,600)

Contribution 50,400

Less Fixed Costs

Production Overhead 10,000

Administration exps. 16,000
Selling expenses. 9,000

Total Fixed Costs (35,000)

Budgeted Net Profit 15,400

Calculate the ‘Contribution/sales’ ratio.

Contribution /Sales = £/€ 50,400/ £/€ 168,000

= 30%

Breakeven sales revenue = Fixed Costs/CS ratio.

£/€ 35, 000/0.3 = £/€ 116, 667 breakeven sales revenue.

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 (b)

176 Revenue
168 D Total Cost

160

152
C
144

136

128
E
120

112

104

96

88

80

72

64

56

48
Fixed Costs
40

32

24

16

8
A B
0
Units ('000) 4 8 12 16

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 Identify required areas
Margin of safety = CDE
Profit area = CDE
Breakeven area = E

(c)
Main weaknesses which should be identified are as follows:
1. B/E charts are only applicable to a single product or a constant product mix.
2. It is assumed that fixed costs do not change at all. This ignores the stepped nature of such
costs. Similarly, variable costs are assumed to remain the same at all output levels, even
though economies of scale may result in savings at higher volume levels.
3. No variation in sales price is assumed which may be unrealistic.
4. Changes in stock levels are ignored.
5. B/E charts depict short-term relationships and are not suitable for long term planning
purposes.
6. Any conclusions drawn are only relevant within the relevant range.
7. Efficiency and productivity levels remain constant.
8. It is assumed that the only factor affecting cost is volume. This is a significant
oversimplification.

Solution to Question 10 Autumn 2012

(a)
Contribution = (800-200) = 600 per passenger
Total Fixed Costs = (2,250,000+(150,000*52) = 10,050,000

(i)Break-even Point
TFC 10,050,000 16,750
CPU 600

(ii) Target Profit Levels

TFC + TP 11,250,000 18,750
CPU 600

(iii) Margin of Safety (17,000 – 16,750) 1.47%

17,000

This represents the extent by which budgeted sales could fall before breaching the break-even point.

(iv) Cost volume profit graph for SSL’s cruise venture

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 REVENUES
COSTS (€/£Ms)
20

TOTAL REVENUE

15 BEP Profit
TOTAL COST

Loss

10 TOTAL FIXED COST

0 5 10 15 20
PASSENGERS (000S)

Solution to Question 11 Summer 2011

(a)(i) Contribution earned from each product

STARTWIN FASTWIN
Selling price €/£300 €/£345
Less variable costs €/£120 €/£115
Contribution/board €/£180 €/£230

(a) (ii) Break-even point

The boards are sold in the ratio of 3:2 which is the same as 60% of all sales are STARTWIN and 40%
of all sales are FASTWIN
STARTWIN FASTWIN
Contribution/board €/£180 €/£230
% of total sales 60% 40%
Weighted contribution [€/£180 x 60%] €/£108 [€/£230 x 40%] €/£92

Weighted contribution [ 108 +92] = €/£200

Fixed costs
Labour [10,800 hrs x €/£15] €/£162,000
Overheads €/£108,000
€/£270,000

Break-even in units [€/£270,000 / €/£200] = 1,350 boards

Number of STARTWIN [1,350 boards x 60%] = 810 boards
Number of FASTWIN [1,350 boards x 40%] = 540 boards

(a)(iii) Number of each surfboard required to make a profit of €/£/€/£50,000

[Fixed costs + required profit]/weighted contribution

[€/£270,000 + €/£50,000]/€/£200 = 1,600 boards
Number of STARTWIN [1,600 boards x 60%] = 960 boards
Number of FASTWIN [1,600 boards x 40%] = 640 boards

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 (b)(i)
STARTWIN FASTWIN
Contribution/board €/£180 €/£230
% of total sales 40% 60%
Weighted contribution [€/£180 x 40%] €/£72 [€/£230 x 60%] €/£138

Weighted contribution [ 72 +138] = €/£210

New fixed costs [€/£270,000 + €/£24,000] = €/£294,000

Break-even in units [€/£294,000 / €/£210] = 1,400 boards

Number of STARTWIN [1,400 boards x 40%] = 560 boards
Number of FASTWIN [1,400 boards x 60%] = 840 boards

(b)(ii) Number of each surfboard required to make a profit of €/£/€/£52,500

[Fixed costs + required profit]/weighted contribution

[€/£294,000 + €/£52,500]/€/£210] = 1,650 boards
Number of STARTWIN [1,650 boards x 40%] = 660 boards
Number of FASTWIN [1,650 boards x 60%] = 990 boards

(b) (iii) Operating leverage / gearing is a measure of how sensitive net operating profit is to
percentage changes in sales. If operating leverage / gearing is high, a small percentage
increase in sales can produce a much larger percentage increase in net operating profit.
However, the opposite will happen if there is a small percentage drop in sales. Net operating
profit will fall by a greater amount. For example, Company A reclassifies a proportion of its
variable costs as now being fixed. In the example below the operating leverage ratio
increases from 4 to 8.

Company A Company A
Scenario 1 Scenario 2
Sales 50,000 50,000
Variable costs (30,000) (10,000)
Contribution 20,000 40,000
Fixed Costs (15,000) (35,000)
Net profit 5,000 5,000

Operating leverage ratio 4 8

20,000 / 5,000 40,000 / 5,000

If then a 10% increase in volume occurs, assuming no further fixed costs change the overall effect on
net profit will be:

Company A Company A
Scenario 1 Scenario 2
Contribution + 10% 22,000 44,000
Fixed costs (15,000) (35,000)
Contribution 7,000 9,000

Overall net profit will increase in favour of the second scenario. The additional volume means less per
unit is being costed against fixed costs thereby increasing overall profits. The operating leverage ratio
works in favour of the company.

If then a 10% decrease in volume occurs, assuming no further fixed costs change, the overall effect in
net profit will be

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 Company A Company A
Scenario 1 Scenario 2
Contribution - 10% 18,000 36,000
Fixed costs (15,000) (35,000)
Contribution 3,000 1,000

Overall net profit will decrease and scenario 1 is preferable. The reduced volume means each unit
must cover proportionally more fixed cost per unit thereby reducing overall net profit. The operating
leverage ratio works against the company.

(c) Qualitative factors

 Boards requiring rework before leaving factory
 Warranty claims
 Accidents

Solution to Question 12 Autumn 2009

(a) Room occupancy (April-Sept) = 6,405 / (183x50) = 70%
Room occupancy (Oct-March) = 5,642 / (182x50) = 62%

(b)
April-Sept Oct-March
Contribution €/£ €/£
6,405 x €/£(50 – 20) 192,150
5,642 x €/£(50 – 20) 169,260
Fixed costs (6 months) 180,000 180,000
Profit 12,150 (10,740)

(c) Contribution per room = €/£50 - €/£20 = €/£30

Fixed costs per month €/£30,000

Break-even rooms per month = €/£30,000/€/£30 = 1,000

(d) There will be 30 standard room and 20 executive rooms i.e. a ratio of 3:2 or 60% of total sales
are Standard and 40% of total sales are executive.

Standard Executive
Sales €/£50 €/£80
Variable costs €/£20 €/£30
Contribution per room €/£30 €/£50
% of total sales 60% 40%
Weighted contribution €/£18 (€/£30 x 60%) €/£20 (€/£50 x 40%]

Weighted break-even = [€/£18 + €/£20] €/£38

Fixed costs are increased to [€/£30,000 + €/£10,000] = €/£40,000

Break-even [€/£40,000/€/£38] = 1,053 rooms

Standard rooms [1,053 rooms x 60%] = 632 rooms
Executive rooms [1,053 rooms x 40%] = 421 rooms

(e) Number of rooms required to break-even is higher when the executive rooms are
introduced (1,053 compared to 1,000 previously) mainly due to the increased fixed costs.

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 (f) Possible suggestions:

(i) Offer free/cheap car parking to travellers.

(ii) Offer deal for passengers flying with named airlines.

Solution to Question 13 Summer 2012

(a)
Forecast Proposal A Proposal B
Number of tickets sold 57,600 74,880 68,400
£/€ £/€ £/€

Selling price 17.50 17.50 16.80

Less
Direct labour 5.70 5.70 5.70
Variable service o/h 5.20 5.20 5.20
Variable fee 2.60 1.90 2.60
Advertising commission 1.50

Marginal cost 13.50 14.30 13.50

Contribution per ticket a 4.00 3.20 3.30

(i)
Total contribution 230,400 239,616 225,720

Fixed Costs (Rental & 200,400 200,400 194,160

Promotional)
15,420
Advertising
Total 200,400 215,820 194,160
Net profit a (iii) 30,000 23,796 31,560
Change in profit b (iii) - (6204) 1,560

Breakeven volume 50,100 67,444 58,836

a (ii)
Change in Breakeven b (i) +17,344 + 8,736
% Margin of safety 13.02 9.93 13.98
a (iv) & b (ii)

WORKINGS
Fixed costs for rent in the question is given on an annual basis but the break-even is only
required for a three month period.

Contribution per ticket:

£/€ £/€
Selling price 1,008,000/57,600 17.50
Marginal costs:
Direct labour 328,320/57,600 5.70
Variable service o/h 299,520/57,600 5.20
Variable fee 149,760/57,600 2.60 13.50
Contribution 4.00

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 Number of tickets forecast in Quarter 3 = 72,000 x 0.8 = 57,600

(b) iv. From the analysis above, Proposal B would be best option. This means that the increased
volume, although resulting in a lower contribution per ticket, would result in a higher net profit
because of the reduced administration fees. The net profit would be £1,560 higher than the
forecast. Although the breakeven point is higher, the margin of safety is higher than the current
forecast they are both lower than Proposal B.

Solution to Question 14 Summer 2013

(a)

ANNUAL FIXED COST €/£

FERRY LEASE 180,000
INSURANCE PREMIUM 60,000
RENTAL OF JETTY 150,000
TOTAL ANNUAL FIXED COST 390,000

VARIABLE COST PER RETURN JOURNEY €/£

STAFFING 100
CAPTAIN 200
FUEL 300
VARIABLE COST PER RETURN JOURNEY 600

(b)

GROSS REVENUES PER JOURNEY (50 *

25) 1,250
VARIABLE COST PER RETURN JOURNEY (600)
CONTRIBUTION PER RETURN JOURNEY 650

BREAK EVEN POINT

TOTAL ANNUAL FIXED COST 390,000
CONTRIBUTION PER RETURN JOURNEY 650

BREAK EVEN POINT – ANNUAL

CROSSINGS 600
DAYS OPERATING 300

BREAK EVEN DAILY RETURN

CROSSINGS 2

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 (c)

GROSS REVENUES PER JOURNEY (40 *

25) 1,000
VARIABLE COST PER RETURN JOURNEY (600)
CONTRIBUTION PER RETURN JOURNEY 400

TARGET PROFIT - DAILY RETURN

CROSSINGS
TOTAL ANNUAL FIXED COST + PROFIT 600,000
CONTRIBUTION PER RETURN JOURNEY 400

ANNUAL CROSSINGS 1,500

SERVICE DAYS 300

REQUIRED DAILY RETURN CROSSINGS 5

(d)

GROSS REVENUES PER JOURNEY NIL

VARIABLE COST PER RETURN JOURNEY (600)
LOSS PER RETURN JOURNEY (600)

INCREMENTAL COSTS - VARIABLE ONLY PER

CROSSING (600)
ADDITIONAL CROSSINGS REQUIRED 300
ANNUAL SUM REQUIRED FROM LOCAL
AUTHORITY 180,000
MONTHLY FEE REQUIRED FROM LOCAL
AUTHORITY 15,000

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 Solution to Question 15 Summer 2014
a) Variable cost per occupied night for a i) single room and ii) double room:
Variable cost per occupied room night
Occupancy type Single Double
Cost €/£ €/£
Breakfast 9 18
Linen 10 10
Light & heat 3 5
Water 4 8
Total VC per occupied room 26 41

b) Total annual fixed costs of running the guesthouse:

Annual fixed costs

Cost €/£ Workings
Rates 7,560 18*420
Landscaping 16,640 52*320
Housekeeper costs 74,520 69*360*3
Cook costs 37,260 6*17.25*360
Cover costs 6,580 100*(65.80)
Light & heat 54,000
Total annual fixed cost 196,560

c) Weighted Average Contribution per room per night, using the relative mix of corporate and
tourist guests occupying each room:

Selling price per room €/£ 100 €/£ 125

Contribution per room €/£ 74 €/£ 84

Weightings 0.4 0.6
TOTAL
Weighted average contribution per room €/£ 29.6 €/£ 50.4 €/£ 80

d) The break-even number, on a weighted average contribution basis, of rooms to be occupied

nightly:

Breakeven point
Total annual cost €/£196,560
Weighted average contribution per room €/£ 80
Annual room break-even point 2,457
Nightly break-even point [2,457/360 days] 6.8 rooms (rounding to 7 rooms)

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 e) Margin of safety, on a weighted average basis, based on the estimated occupancy levels:

Margin of safety [(10-7)/10] * 100 30%

f) New nightly breakeven and margin of safety for Wayside Guesthouse following the pricing
strategy change.
Breakeven point
Total annual cost [196,560 + 20,880] €/£ 217,440
Weighted average contribution per room (W1) €/£ 75.5
Annual room break-even point 2,880
Nightly break-even point [2,880/360 days] 8

Margin of safety [(12-8)/12]*100 33%

W 1:

Selling price per room €/£ 109 €/£ 109

Contribution per room €/£ 83 €/£ 68

Weightings 0.5 0.5
Total
Weighted average contribution per room €/£ 41.5 €/£ 34 €/£ 75.5

The proposal increases the risk of the business because of the need to increase fixed costs
and the increase in the nightly breakeven point from 7 to 8 rooms. Whilst the average
contribution per room falls by €/£ 4.50 this will be more than compensated for if on average
two more rooms are sold per night as calculated below:

INCREMENTAL PROFIT €/£

Revised Contribution (12*360*75.5) 326,160
Original Contribution (10*360*80) (288,000)
Increased Contribution 38,160
Increased Fixed Costs (20,880)
Increased Profit 17,280

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