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# CVP question/Product cost

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These 2 questions are proving to be too much for me and I am running short of time!! I really need to see how one would work through these calculations, step by step and then understand why.

Question 1:
The Yandina Manufacturing Company Ltd produced 40,000 lamps in 2008. The following
cost data were obtained from company records:
Annual Amounts\$
120,000
200,000
80,000
120,000
40,000
80,000
Amounts Per unit \$
3.00
5.00
2.00
3.00
1.00
2.00
Direct materials
Direct labour
Revenue sales for 2008 were \$2,500,000 with a selling price per unit of \$62.50.
The company's income tax rate last year was 50 per cent and is expected to remain the
same next year.
Sales in units for 2009 are expected to remain the same. Based on market research,
Yandina anticipates that it with be possible to achieve an increase of 8 per cent in the selling price
in 2009.
All variable costs are budgeted to increase by 5 per cent while fixed costs are estimated to
increase 3 per cent.
Required
1. Calculate the annual contribution margin and the contribution margin per lamp unit for 2008.

2. Using the contribution margin approach, calculate the company's break-even point in units for
2008
3. What is the contribution margin ratio for 2008?

4. Calculate the break-even sales revenue. Use the contribution margin ratio in your calculation
for 2008
5. Using CVP analysis, how many lamps must Yandina Company sell in 2009 to have a net
operating profit after tax (NPAT) of \$1,000,000?)
6. Will the Yandina Company achieve the desired 2009 net operating profit after tax (NPAT) of
\$1,000,000 if sales for 2009 remain at 40,000 lamps (as in 2008)? Explain, briefly in about 25
words, why or why not
7. Explain, in about 100 words, how cost volume profit (CVP) analysis can be used by
management
8. One of the assumptions underlying CVP analysis is a constant sales mix over the relevant
range of activity. What are the other assumptions underlying CVP analysis? Provide your
Page 1 of 2

Questions 2:
The Noosa Bicycle Co Pty Ltd (NBC) manufactures two types of racing bicycles?amateur and
professional. NBC uses the plantwide costing approach to allocate overhead costs to each product
and base the allocation on the direct labour hours used by each product. Currently, the total
overhead costs budgeted for January 2009 is \$14,800. NBC uses the cost plus 20% mark-up
method to establish each product's selling price. Consequently, NBC has set its current selling
price for amateur at \$182.40 and professional at \$255.60.
In recent months, a trend has developed in orders where demand for the professional racing
bicycles has increased by 10% but amateur racing bicycles have decreased by 5%. For example,
NBC sold 210 amateur bicycles and 90 professional bicycles in December 2008. The managing
director is considering reducing the production level of amateur bicycles and possibly, if the
current trend continues, dropping the amateur range. However, you believe that before making a
decision on changing production levels or dropping a product range you need to examine the
accuracy of the current costing system.
You have been engaged as an external consultant. You think that you need to analyse the
information using the activity-based costing method because you believe it will be a better means
to allocate overhead costs to each product. The following information has been provided for
January 2009. The sales forecast figures, monthly costs, and activities reflect the changing trend
in demand for each product:
Budgeted Monthly Sales and Costing Data for January 2009
Product
Amateur
Professional
Quantity of
January Sales
200
100
Direct Material
Costs
\$90
\$120
Component
No. of Parts
10
15
25
Direct Labour
Hours
400
300
Activity
No. of Design
Changes
6
9
15
Direct Labour
cost
\$4,000
\$3,000
Activity
No. of
Setups
5
7
12
Monthly Activity and Component Data for January 2009
Activity
No. of times bicycles
are Handled
20
30
50
Product
Amateur
Professional
Total activities
The total overhead costs based on activities and components for January 2009 were:
Handling\$5,000
No. of parts\$6,500
Design changes\$1,800
Setups\$1,500
Total\$14,800

Required
1. Calculate the unit cost for each product using direct labour hours as the basis for applying
2. Calculate the unit cost for each product using activity-based costing (i.e., ABC approach) and
new selling price for each bicycle using the cost plus 20% mark-up method.