CVP

QUESTION ONE
Ardennes limited makes and sells two products A and B, each of which passes through the same automated production operations. The following estimated information is available for period 1:
(i) Product unit data: A B
Selling price per unit (ZMW) 60 70
Direct material cost (ZMW) 2 40
Variable production overhead cost (ZMW) 28 4
Overall hours per product unit (hours) 0·25 0·15
(ii) Budgeted production/sales of products A and B are 120,000 units and 45,000 units respectively. The selling prices per unit for A and B are ZMW60 and ZMW70 respectively.
(iii) Maximum demand for each product is 20% above the budgeted sales levels.
(iv) Total fixed production overhead cost is ZMW1,470,000. This is absorbed by products A and B at an average rate per hour based on the estimated production levels.
One of the production operations has a maximum capacity of 3,075 hours that has been identified as a bottleneck that limits the overall production/sales of products A and B. The bottleneck hours required per product unit for products A and B are 0·02 and 0·015 respectively.
Required:
i. State Any two ways of exploiting a bottleneck. (2 marks)
ii. Calculate the mix (units) of products A and B that will maximise net profit and the value (ZMW) of the maximum net profit. (9 marks)
iii. Briefly explain how planning can improve performance measurement and management.
(4 marks)

QUESTION TWO
The following details relate to three services provided by SXQ limited.
Service: S X Q
ZMW ZMW ZMW
Fee charged to customers for each unit of
Service 84 122 145
Unit service costs
Direct materials 12 23 22
Direct labour 15 20 25
Variable overhead 12 16 20
Fixed overhead 20 42 40
All three services use the same type of direct labour which is paid at ZMW30 per hour.
Required.
i. In a period when the availability of the direct labour is limited, determine the most and least profitable use of the direct labour. (6 marks)
ii. Perform a sensitivity analysis for each of the cost variables and revenue variable for the most profitable product, and comment on your results. (5 marks)
iii. Calculate the Net profit/loss margin ratio for each product. (4 marks)
QUESTION THREE
Mwengu a third year accounting student is planning to set up a mini play park in Lusaka. The following relates to different pricing plans of visiting the park and costs of running the park.
Pricing Plan 1 : (a special pack will be included) variable costs account for 56.7% of the selling price while Pricing Plan 2 🙁 the special pack not to be included) variable costs account for 36% of selling price.
Entry Charges per customer:
Price Plan 1 = ZMW 30 per Customer
Price Plan 2 = ZMW 25 per Customer
Total Fixed Costs ZMW200,000
Required:
i. Using the CVP formula, calculate the number of units (and sales amount) for achieving Breakeven. (3 marks)
ii. How many customers are required to make a profit of ZMW30, 000 for both plans, if fixed costs increased by 30%. (5 marks)
iii. Explain the relationship between Break-Even point and Operating Leverage. (3 marks)
iv. Explain how Target Costing can be applied to improve the break even time and liquidity of this business. (4 marks)