- 13 Marks
MA – May 2016 – L2 – Q2b – Cost-Volume-Profit (CVP) Analysis, Relevant Cost and Revenue
Calculate break-even points, operating leverage, and expected income for two rent options for a bakery.
Question
Anima Ventures wants to start a new bakery at Bodwease in Ashanti Region. She plans to rent a storeroom for her operations under the following terms and conditions:
| Option 1 | Option 2 | |
|---|---|---|
| Fixed Rent Charge | GH¢5,000 | GH¢3,000 |
| Variable Rent | – | 10% of selling price of each loaf |
The following data are also relevant for her business:
- Selling Price: GH¢5.00
- Material Cost (Flour): GH¢0.80
- Material Cost (Margarine): GH¢0.70
- Labour Cost: GH¢0.50
Required:
i) Determine the break-even point in units under each option.
(2 marks)
ii) Calculate the degree of operating leverage (DOL) for the two options if 10,000 loaves of bread are to be sold in the current year.
(4 marks)
iii) What would be the expected operating income if sales increase by 25% next year?
(4 marks)
iv) Which of the two options would you recommend to Anima Ventures and why?
(3 marks)
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