- 20 Marks
MA – Nov 2020 – L2 – Q5 – High/Low Analysis, Cost-Volume-Profit (CVP) Analysis
Determine maintenance costs using the high-low method, and calculate break-even point, required sales for target profit, and margin of safety for Quickspray Ltd.
Question
Quickspray Ltd offers professional car spraying services at Suame Magazine. The company is planning its activities for the month of June 2018 for its saloon car spraying section. The company charges a service fee of GH¢1,000 and incurs fixed cost (excluding fixed maintenance cost) and variable cost per unit (excluding variable maintenance cost) of GH¢35,000 and GH¢644.39 respectively for spraying a saloon car.
The following data also relates to Quickspray Ltd on the maintenance hours of its key machine, revenue, and profit for the six months ended April 2018:
| Month | Maintenance Hours | Revenue (GH¢) | Profit (GH¢) |
|---|---|---|---|
| November 2017 | 1,200 | 19,000 | 700 |
| December 2017 | 1,425 | 24,000 | 1,425 |
| January 2018 | 1,410 | 20,100 | 650 |
| February 2018 | 1,400 | 20,000 | 1,000 |
| March 2018 | 1,175 | 18,000 | (125) |
| April 2018 | 1,275 | 19,000 | 175 |
Total fixed cost increases by GH¢1,120 when maintenance hours go beyond 1,400.
Required:
a) Determine the total maintenance cost of production, using the high-low method if:
i) Maintenance hours for May are budgeted to be 1,520.
ii) Maintenance hours for June are budgeted to be 1,075.
b) Calculate for the month of May the:
i) Break-even point in units and value.
ii) Sales level required to make an after-tax profit of GH¢21,150, assuming Quickspray Ltd is in the 25% tax bracket.
iii) Margin of safety if the target after-tax profit of GH¢21,150 is achieved.
Find Related Questions by Tags, levels, etc.
- Tags: Break-Even Point, High-Low Method, Maintenance Costs, Margin of Safety, Profit Planning
- Level: Level 2
- Topic: Cost-Volume-Profit (CVP) Analysis, High/Low Analysis
- Series: NOV 2020