Question 3

A. Discuss the limitations of CVP analysis?

B. Queen Mary Company manufactures and sells a telephone answering machine. The company’s contribution format profit and loss account for the most recent year is given below: 

Management is anxious to improve the company’s profit performance and has asked for several items of information.

Required:

1.Compute the company’s Contribution/margin ratio and variable expense ratio.

2. Compute the company’s break-even point in both units and sales pound. Use the equation method.

3. Assume that sales increase by ₤400,000 next year. If cost behaviour patterns remain unchanged, by how much will the company’s profit increase. Use the CM ratio to determine your answer.

4. Refer to the original data. Assume that next year management wants the company to earn a minimum profit of ₤90,000. How many units will have to be sold to meet this target figure?

5. Refer to the original data. Compute the company’s margin of safety in both pound and percentage form.

6. In an effort to increase sales and profits, management is considering the use of a higher-quality speaker. The higher-quality speaker would increase variable costs by ₤3 per unit, but management could eliminate one quality inspector who is paid a salary of ₤30,000 per year. The sales manager estimates that the higher-quality speaker would increase annual sales by at least 20%.

Required:

(a) Assuming that changes are made as described above, prepare a projected profit and loss account for next year. Show data on a total, per unit, and percentage basis.

(b) Compute the company’s new break-even point in both units and pounds of sales. Use the CM method.

(c) Would you recommend that the changes be made?