CMA Study Group

CVP analysis

  • 1.  CVP analysis

    Posted 08-03-2021 04:53 AM

    Western Wear Co. is launching a new line of shirts. The following cost information relates to the product line.

    Unit Costs
    Direct Materials$9.25
    Direct Labor$4.00

    Direct Materials, Direct Labor, and Distribution are all variable costs. The company will incur $180,000 of additional fixed costs associated with this new product. A corporate fixed charge of $30,000 currently absorbed by other products will be allocated to this new product (on top of the $180,000 fixed costs associated directly with this new product).

    If the selling price is $24 per unit, the breakeven point in units (rounded to the nearest hundred) for shirts is:

    The answer is 20,000 units. 

    As per the otb for breakeven point only 1,80,000 should be considered as fixed cost and not the additional allocated fixed cost of 30,000. Can someone explain why we cant consider 30,000.

  • 2.  RE: CVP analysis

    Posted 08-03-2021 06:30 AM
    BEP = Fixed cost/(price-variable cost). $180,000 is the fixed cost ​related to the product line and will be incurred and absorbed by this line. the other $20,000 has been already absorbed by other product line plus it is not an incremental cost to this line. we can not use it a twice. it is wrong. on the other hand it was used in the other product line as the problem stated.
    BEP = 180,000 /(24 -15)= 20,000 Units.

    Mohamed Aly
    Chief Financial Officer
    Saudi Arabia

  • 3.  RE: CVP analysis

    Posted 08-03-2021 10:01 AM
    Thanks Mohamed. It makes sense now.

    Kirti Sheth