CVP Analysis

Neeta is considering selling Do-All Software, a home-

office software, at a computer convention in New Delhi.
She can purchase this software from a computer software
wholesaler at Rs.1,200 per package, with the privilege of
returning all unsold packages and receiving a full
Rs.1,200 refund per package. She would pay Rs.20,000
to Computer Conventions Ltd. for the booth rental at the
convention. She will incur no other costs.
She must decide whether she should rent a booth.

She predicts that she can charge a price of Rs.2,000 for

Do-All Software.
How many units must Neeta sell to earn an operating

income of Rs.12,000?
How many units must Neeta sell to earn a net income of
Rs.10,800?
Neeta anticipates selling 40 units at the convention. She is

considering placing an advertisement describing the

product and its features in the convention brochure. The
advertisement will cost Rs.5,000. She thinks that
advertising will increase sales by 10% to 44 packages.
Should Neeta advertise?
Neeta is contemplating whether to reduce the selling price

to Rs.1,750. At this price, she will sell 50 units. At this

quantity, the software wholesaler will sell the package to
Neeta for Rs.1,150 per package instead of Rs.1,200.
Should Neeta reduce the selling price?
 Neeta is now budgeting for subsequent computer
convention in Chennai. She plans to sell two different
software products- Do-All and Super-Word, and budgets
the following:
 Do-All Super-Word Total
Expected sales 60 40 100
Revenues- Do-All Rs.2,000 Rs.1,20,000 Rs.40,000 Rs.1,60,000
Super-Word Rs.1,000

VC- Do-All Rs.1,200 72,000 28,000 1,00,000

Super-Word Rs.700

Contribution Margin 48,000 12,000 60,000

Fixed costs 45,000
Operating income 15,000
What is the BEP?
There are many sales mixes that result in a contribution
margin of Rs.45,000 and cause Neeta to break even-
Sales mix CM Total CM
Units Rs. Rs.
Do-All Super-Word Do-All Super-Word
 800 300


48
 22 38,400 6,600 45,000


36
 54 28,800 16,200 45,000


30
 70 24,000 21,000 45,000
Multiple cost driver
Suppose Neeta will incur a variable cost of Rs.100 for

preparing documents (including an invoice) for each

customer who buys Do-All software.
OI = Q * SP – Q * Pur. Price of software – No. of customers * Cost


of preparing documents – Fixed costs

Neeta sells 40 packages to 40 customers
Neeta sells 40 packages to 15 customers

Neeta sells 26 packages to 8 customers

Neeta sells 27 packages to 16 customers

Exide Battery Ltd. manufactures high quality battery. Company’s
plant has annual capacity of 25,000 units. Currently sells 20,000
units at price of Rs.1,050. following cost structure:
Variable manufacturing cost per unit Rs.450
Fixed manufacturing costs Rs.16,00,000
Variable marketing and distribution cost per unit Rs.100
Fixed marketing and distribution costs Rs.12,00,000
Marketing dept. indicates that decreasing selling price to 990 would

increase sales to 25,000 units. This will require Exide to increase

fixed mktg and distribution costs. Calculate the maximum
increase in fixed mktg and distribution costs that will allow Exide
to reduce selling price to Rs.990 and maintain operating income.
Mfg. dept proposes changes in mfg process to add new features. This

will increase fixed mfg costs by Rs.5,00,000 and var. mfg costs by
Rs.20 PU. At its current sells qnty of 20,000 units, compute
minimum selling price that will allow Exide to add new features
and maintain its operating income.

Birla company manufactures and sells adjustable canopies
that attach to motor homes and trailers. For its current
year budget, Birla estimated the following:
Selling price Rs.20,000 Variable cost per canopy

Rs.10,000 Annual fixed costs Rs.50,00,000

Netincome Rs.1,20,00,000 Income tax rate 40%
The May financial statement reported that sales were not

meeting expectations. For the first 5 months of the year,

only 350 units had been sold at the established price,
with variable costs as planned, and it was clear that the
net income projection for current year would not be
reached unless some actions were taken. A management
committee presented the following mutually exclusive
alternatives to the president.
Reduce the selling price by Rs.2,000. The sales
organization forecasts that at this significantly reduced
price, 2,700 units can be sold during the remainder of the
year. Total fixed costs and variable cost per unit will stay
as budgeted.
Lower variable cost per unit by Rs.500 through the use of

less expensive direct materials and slightly modified

manufacturing techniques. The selling price will also be
reduced by Rs.1,500 and sales of 2,200 units are
expected for the remainder of the year.
Reduce fixed costs by Rs.5,00,000 and lower the selling

price by 5%. VC per unit will be unchanged. Sales of

2,000 units are expected for remainder of the year.
Lee Company has 3 product lines of belts: X, Y and Z with
contribution margins of Rs.15, 10 and 5 resp. president foresees
sales of 1,00,000 units in the coming period, consisting of 10,000
units of X, 50,000 units of Y and 40,000 units of Z. fixed costs for
the period are Rs.5,10,000.
If sales mix is maintained, what is the total contribution when

1,00,000 units are sold? What is the operating income?

What is BEP in units assuming that given sales mix is maintained