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    4AC012 Answers To Week 3 Tutorial Exercises

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    Rohit Vijay Patil
    The document contains example calculations and 10 exercises solving various business scenarios involving revenue, costs, contribution, break-even analysis, and profit. It provides the steps and calculations to determine figures like contribution per unit, break-even point, margin of safety, and profit for businesses under different conditions.

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    4AC012 Answers To Week 3 Tutorial Exercises

    Uploaded by

    Rohit Vijay Patil
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    The document contains example calculations and 10 exercises solving various business scenarios involving revenue, costs, contribution, break-even analysis, and profit. It provides the steps and calculations to determine figures like contribution per unit, break-even point, margin of safety, and profit for businesses under different conditions.

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    4AC012 Answers to Week 3 Tutorial Exercises

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    The document contains example calculations and 10 exercises solving various business scenarios involving revenue, costs, contribution, break-even analysis, and profit. It provides the steps and calculations to determine figures like contribution per unit, break-even point, margin of safety, and profit for businesses under different conditions.

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    32 views6 pages

    4AC012 Answers To Week 3 Tutorial Exercises

    Uploaded by

    Rohit Vijay Patil
    The document contains example calculations and 10 exercises solving various business scenarios involving revenue, costs, contribution, break-even analysis, and profit. It provides the steps and calculations to determine figures like contribution per unit, break-even point, margin of safety, and profit for businesses under different conditions.

    Copyright:

    © All Rights Reserved
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    of 6

    4AC012 – Answers to Tutorial Exercises in Week 3 Class Handout

    Example - Val

    5 chairs per week 3 chairs per week


    £ £ £ £
    Sales revenue …500…. ………300……
    Less: variable costs
    Wood …100……. ……60……
    Labour ……200……. ………120……
    (……300……..) (………180…..)
    Contribution ……200…….. ………120……..
    Less: fixed cost
    Rent (……150…..) (……150….)
    Profit/(Loss) ………50…….. ………(30)………

    Exercise 1
    Wilson

    a) Contribution per hat = 35 – (12 + 7 + 1) = £15 per hat

    b) Total contribution = Quantity x contribution per hat


    = 10,000 x £15 = £150,000

    c) Profit = Contribution – Fixed Costs = 150,000 – 82,000 = £68,000

    d) Total contribution = 12,000 x £15 = 180,000


    Less: Fixed Costs = (82,000)
    New Profit = 98,000

    Or, take previous profit in part (c), and = 68,000


    add on: extra contribution (2,000 x £15) = 30,000
    New Profit 98,000
    Exercise 2- Jungle Animals

    Selling Price Variable Contribution


    Cost (a)
    £ £ £
    Alligators 1.00 1.05 (0.05)
    Bear 1.20 1.00 0.20
    Cougars 1.10 1.14 (0.04)
    Donkeys 1.15 1.08 0.07
    Eagles 1.20 0.96 0.24

    b) The two toys with highest contribution are Eagles £0.24 and Bear
    £0.20
    c) Alligators £(0.05) and Cougars £(0.04) have negative contributions so
    we would not make them

    Exercise 3- Riskmore

    Car Home Personal Misc. Total

    £ £ £ £ £
    Revenue 80,000 60,000 40,000 20,000 200,000

    Variable costs (25,000) (25,000) (25,000) (25,000) (100,000)

    Contribution 55,000 35,000 15,000 (5,000) 100,000

    Fixed costs 50,000

    Net Profit 50,000

    It seems that all the divisions are making a positive contribution, except for
    miscellaneous. However, the car division is actually the most profitable.
    Certainly, Riskmore should consider shutting down the miscellaneous division and
    increase profits to £55,000 (contributions from Car [£55,000], Home
    [£35,000] and Personal [£15,000]= £105,000 less fixed costs of £50,000).
    Perhaps it should also focus even more on the car division. However, Riskmore
    should be careful that shutting the miscellaneous division would not have a
    knock-on effect on the other divisions

    Exercise 4- Scrooge Ltd.

    Internal bid: £
    Direct Materials 25,000
    Direct Labour (10,000 hours at £14) 140,000
    Variable overheads (10,000 hours at £3) 30,000
    195,000

    External bid 190,000

    Thus saving by buying in (195,000-190,000)= £5,000

    So Scrooge would outsource. The chief assumption is that all the Labour is
    indeed variable and can be laid off or redeployed easily. Other factors are the
    impact upon industrial relations, long-term implications and confidentiality. The
    outside bid is marginally superior. However, when these factors are taken into
    account it may be better to go with the status quo.

    Exercise 5
    Break-even point = Fixed costs
    Contribution per unit

    = 34,000 = 34,000 = 2,000 units


    (40.23) 17

    Exercise 6
    a) Break-even point = Fixed costs
    Contribution per unit

    = 5,000 = 2,500 units


    (5-3)

    b) Total contribution = Quantity x contribution per unit


    = 4,000 x £2 = £8,000

    c) Margin of safety, in units = 4,000 – 2,500 = 1,500 units

    Margin of safety as percentage = 4,000 – 2,500 x 100 = 37.5%


    4,000

    Exercise 7
    Contribution per unit = 75 – 25 = £50

    a) Required activity in units = Fixed costs


    Contribution per unit

    = 750,000 = 15,000 units


    50
    b) Required activity in units = Fixed costs + Target Profit
    Contribution per unit

    = 750,000 + 125,000 = 875,000 = 17,500 units


    50 50

    Turnover required = Units to be sold x selling price per unit


    = 17,500 x £75 = £1,312,500

    Check:
    Turnover 1,312,500
    Variable costs 25 x 17,500 (437,500)
    Contribution 875,000
    Less: fixed costs (750,000)
    Profit 125,000

    Exercise 8- Godfrey

    a) Break-even point = Fixed costs


    Contribution per unit

    = 40,000 = 40,000 = 5714.3 = 5715 units


    (17-4-6) 7

    b) Margin of safety, in units = 7,000 – 5,715 = 1,285 units


    Margin of safety as percentage = 7,000 – 5,715 x 100 = 18.4%
    7,000

    c) Activity level required = Fixed costs + Target profit


    Contribution per unit

    = 40,000 + 15,000 = 55,000 = 7,857.1 = 7,858 units


    (17-4-6) 7

    Exercise 9- Cawdron
    a) Estimated profit
    Contribution per unit = 120 – 50 = 70

    Total contribution = Quantity x contribution per unit


    = 15,000 x £70 = £1,050,000
    Less: fixed costs (600,000)
    Profit 450,000
    b) Profit if selling price reduced to £96 per unit
    Revised Contribution per unit = 96 – 50 = 46

    Total contribution = 15,000 x £46 = £690,000


    Less: fixed costs (600,000)
    Profit 90,000

    c) Profit if fixed costs increase to £750k


    Per part (a), total contribution = 1,050,000
    Less: fixed costs (750,000)
    Profit 300,000

    d) Break-even point = Fixed costs


    Contribution per unit

    = 750,000 = 750,000 = 16,304.3 = 16,305 units


    (96-50) 46

    Exercise 10- Mainwaring

    a) Profit for last year

    Sales (£180 x 50,000) 9,000,000


    Variable costs (£140 x 50,000) (7,000,000)
    2,000,000
    Less : fixed costs (600,000)
    Profit 1,400,000

    OR:
    Contribution per unit = 180 – (70+30+40) = £40
    Total contribution = 50,000 x £40 = £2,000,000
    Less: fixed costs (600,000)
    Profit 1,400,000

    b) Proposal 1
    Sales (£170 x 60,000) 10,200,000
    Variable costs (£140 x 60,000) (8,400,000)
    1,800,000
    Less : fixed costs (600,000)
    Profit 1,200,000

    OR:
    Revised Contribution per unit = 170 – (70+30+40) = £30
    Total contribution = 60,000 x £30 = £1,800,000
    Less: fixed costs (600,000)
    Profit 1,200,000

    c) Proposal 2
    Sales (£175 x 80,000) 14,000,000
    Variable costs (£140 x 80,000) (11,200,000)
    2,800,000
    Less : fixed costs 600 + 50 (650,000)
    Profit 2,150,000
    OR:
    Revised Contribution per unit = 175 – (70+30+40) = £35
    Total contribution = 80,000 x £35 = £2,800,000
    Less: fixed costs 600k + 50k (650,000)
    Profit 2,150,000

    d) Proposal 3
    Sales (£180 x 75,000) 13,500,000
    Variable costs ((£140+4) x 75,000) (10,800,000)
    2,700,000
    Less : fixed costs (600 + 50) (650,000)
    Profit 2,050,000

    OR:
    Revised Contribution per unit = 180 – (70+30+40+4) = £36
    Total contribution = 75,000 x £36 = £2,700,000
    Less: fixed costs 600k + 50k (650,000)
    Profit 2,050,000

    a) Proposal 2 gives highest profit, but concerns over (i) practical


    implications of changing production from 50,000 to 80,000 units,
    and (ii) reliability of link between advertising and additional sales.

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