Reference no: EM132571456

Question (a) You were talking to your friend taking economic major, about cost-volume-profit (CVP) analysis and the approaches that are used to calculate the break-even point. You also described the assumptions that underlie this type of analysis. Your friend proclaimed, "Wow, people learning accounting are pretty simple. Do you realize how unrealistic it is to assume that, no matter how many units you sell, you will realize the same price per unit? And, I have never heard any person suggest that costs are linear. How can you possibly state that assumption? In your world, profit maximization is simple, just produce maximum number amount possible."

Justify the above assumptions in conducting CVP analysis that will satisfy your friend.

Question (b) ABC Industries had sales in 2018 of RM6,400,000 and a gross profit of RM1,100,000. The sales volume was 800,000 units. Management is considering two alternative budget plans to increase gross profit in 2019.

Alternative 1:

Selling price per unit would increase from RM8.00 to RM8.40. Sales volume would decrease to 95 percent of its 2018 sales level at 760,000 units. The ending inventory should be equal to 5 percent of the 2019 sales units.

Alternative 2:

Selling price per unit would decrease by RM0.50 to RM7.50. The marketing department expects that the sales volume would increase by 150,000 units to 950,000 units. The ending inventory should equal to 50,000 units.

Each unit produced will cost RM1.80 in direct labour, RM2.00 in direct materials and RM1.20 in variable overhead. The fixed overhead for 2019 should be RM1,895,000.

(i) Prepare the production budget for 2019 under each plan showing the physical units and costs in the budget table.

(ii) Analyze the production cost per unit under each plan.

(iii) Propose which alternative that should be accepted based on calculations of the gross profits at the new sales volume of each plan.