Cost-Volume-Profit Analysis (CVP)
Bishop Corporation has collected the following information after its first year of sales. Sales were $1,500,000 on 100,000 units; selling expenses $220,000 (40% variable, 60% fixed); direct materials $510,000; direct labour $280,000; administrative expenses $260,000 (20% variable, 80% fixed); manufacturing overhead $350,000 (70% variable, 30% fixed). Top management has asked you to do a CVP analysis so that it can make plans for the coming year. It has projected that unit sales will increase by 10% next year.
Required (show all calculations):
a) Compute (1) the contribution margin for the current year and the projected year, and (2) the fixed costs for the current year. Assume that fixed costs will remain the same in the projected year.
b) Compute the break-even point in units and sales dollars for the current year. Briefly comment on this result.
c) The company is considering the purchase of equipment that would reduce its direct labour costs by $100,000 and would change its manufacturing overhead costs to 30% variable and 70% fixed (assume total manufacturing overhead cost is $350,000, as above). It is also considering switching to pure commission basis for its sales staff. This would change selling expenses to 90% variable and 10% fixed (assume total selling expense is $220,000, as above). Assuming sales remain constant at 100,000 units, compute (1) the contribution margin and (2) the contribution margin ratio, and recompute (3) the break-even point sales dollars. Comment on the effect of these proposed changes on the break-even point.
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