CVP analysis Questions with Answers

CVP Analysis, Costing Method

P-12.20 CVP Application – What If Questions: Sales Mix Issue. This provides a simple illustration of CVP analysis.

CVP application – eliminate product from operations? Body Sculpture, Inc., makes three models of high=performance weight-training benches. Current operating data are summarized here:

MegaMuscle PowerGym ProForce
Selling price per unit 280 400 580
Contribution margin per unit 84 154 116
Monthly sales volume-units 6,000 4,000 2,000
Fixed expenses per month Total of 1,280,000

REQUIRED:

  • a. Calculate the contribution margin ratio of each product.
  • b. Calculate the firm’s overall contribution margin ratio.
  • c. Calculate the firm’s monthly break-even point in sales dollars.
  • d. Calculate the firm’s monthly operating income.
  • e. Management is considering the elimination of the ProForce model due to its low sales volume and low contribution margin ratio. As a result, total fixed expenses can be reduced to $1,080,000 per month. Assuming that this change would not affect the other models, would you recommend the elimination of the ProForce model? Explain your answer.
  • f. Assume the same facts as in part e. Assume also that the sales volume for the PowerGym model will increase by 1,000 units per month if the ProForce model is eliminated. Would you recommend eliminating the ProForce model?

Answers

a) Calculation of contribution margin ratio of each product:

MegaMuscle PowerGym ProForce
Selling price per unit 280 400 580
Contribution margin per unit 84 154 116
(Contribution margin ratio/selling price per unit *100) 30% 38.5% 20%

b) Calculate the firm’s overall contribution margin ratio.

MegaMuscle Power Gym Pro Force Total
Selling price per unit 280 400 580
Contribution margin per unit 84 154 116
Monthly sales volume-units 6,000 46,000 2,000
Total sales (selling price*sales volume) 1680000 1600000 1600000 4440000
Total contribution (contribution per unit*sales volume) 504000 616000 232000 1352000

Overall contribution margin ratio = total contribution/total revenue*100 = 30.45%

c) Breakeven point (in sales) = (Fixed expenses)/(contribution margain ratio)= 1,280,000/(30.45%) = $ 4203612.48

d) Operating income= total contribution – fixed expenses = 1352000 – 1280000 = $ 72000

e) I would not recommend discontinuance of Pro Force as though the sales volume and contribution margin ratio are low, still the product is yielding profits for the company. Discontinuance will leave the factors of production idle. Thus, it is better to keep them employed in production of Pro Force.

f) Additional contribution by producing 1000 units of Power Gym = 1000*154 = $154000. Fixed cost saved= $ 20000

Since Power Gym has the highest contribution margin, transferring resources to its production is recommended as it will give a higher proportion of profits for the firm.