ACF220 TUTORIAL 11.docx

TUTORIAL 11 18.4 Malaka Oyster Company has increased its variale costs per kilo!ram o" oysters harvested. #o$ever% #o$ever% its &'ed costs decreased as a res(lt o" these chan!es. )hy mi!ht this happen and ho$ $ill these chan!es a*ect the &rm+s reak,even sales vol(meAn increase in variable costs per unit can result in decreased fxed costs i the behaviour o a cost has changed such that it requires requires a change in classifcation. An example is the increasing inc reasing opportunity to hire equipment as and when required rather than purchase the equipment and record fxed depreciation costs. This means that the variable cost per unit has increased but the fxed costs have decreased. At Malaka Oyster ompany it is possible that crew members were previously rewarded on the basis o a fxed payment per trip but this has changed to the si!e o the catch. The unit contribution margin" which is the denominator o the break#even $sales volume% equation" decreases when the unit variable cost increases. This increases the break#even point. &owever" the fxed cost $the numerator% has decreased" and this will decrease the break# even point. 'o" the frm(s break#even sales volume increases with the decrease in unit contribution margin but would decrease when there is a decrease in fxed costs. )hether the fnal break#even sales volume has increased or decreased will depend on the relationship between the decreases in $a% the numerator and $b% the denominator. * both increase by the same percentage the break#even sales volume will remain the same. * the fxed costs decrease by a greater percentage than the unit contribution margin the break#even volume will reduce" and vice versa.

18. /'plain $hy sa"ety mar!in means. #o$ can mana!ers (se this in"ormation to mana!e the pro&taility o" a (siness The saety margin margin is the amount by which which budgeted sales revenue revenue exceeds break#even sales revenue. *t is the amount by which actual sales can all below budgeted sales beore losses are incurred. incurred. Managers may use this inormation to highlight how close a pro+ect or enterprise is to the break#even point and hence ocus on maintaining activities so that revenue does not all below the break#even point. *n this way managers can ocus on keeping operations proftable" proftable" which adds to shareholder shareholder value.

18.10 Re"er to the Real Li"e+ on pa!e 812. #o$ co(ld cost vol(me pro&t analysis e (sed in (d!etin! and makin! decisions d ecisions ao(t pricin! co*ee and cakes in a ca"3ost#volume#prof ost#volume#proftt analysis can be used in budgeting by pro+ecting the proft that will be achieved at the budgeted sales volume. ,udgeting in a cae business begins with a sales orecast o number o co-ees and cake to be sold. A / analysis also shows how pricing would contribute to the proftability" as changes in co-ee and cake prices would change the contribution margin and a-ect the break#even sales volume. &owever" it is important to understand that / analysis ignores ignores the e-ect that sales price has on sales volume because it is not designed to predict p redict sales.