## Answers

Ans to Que 1 | ||

Values given in problem: | ||

Direct labour Cost | 138000 | |

Direct Material Cost | 87000 | |

Equipment Depreciation (Straight Line) | 22000 | |

Factory Insurance | 16000 | |

Factory Manager's Salary | 10800 | |

Janitor's Salary | 5000 | |

Packaging Costs | 19600 | |

Property Taxes | 16000 | |

Computation of Closet Link's Total Variable Cost | Amount in $ | |

Direct labour Cost | 138000 | |

Direct Material Cost | 87000 | |

Packaging Costs | 19600 | |

Total Variable Costs | 244600 | |

(A) $ 244600 | ||

Note: | ||

1. Variable Cost vs. Fixed Cost: Variable Cost do not remain constant when sales/ production level change, on the other hand, fixed costs are costs that remain constant regardless of the sales/ production such as equipment depreciation, factory insurance, factory manager's salary, janitor's salary and property taxes. Therefore, theses expenses shall not be considered while calculating variable cost, as these are fixed & do not change with sales level. | ||

Ans to Que 2 | ||

Assumptions of Cost-Volume-Profit(CVP) analysis. | ||

There are several assumptions which are made for doing CVP analysis, some of them are as follows: | ||

1. Total Fixed Costs are constant | ||

2. Variable Cost per unit is constant | ||

3. Sales Price per unit is constant | ||

4. Everything produced is sold | ||

5. Costs are only affected because activity changes | ||

6. If a company sells more than one product, they are sold in the same mix | ||

As per the assumptions given above only one assumption given in the problem is not the assumption of CVP analysis: | ||

(D) The price per unit does not change as volume changes | ||

As the fixed cost per unit vary as per the volume, however, the variable cost per unit remain constant, therefore, when the volume changes variable cost per unit will remain same but the fixed cost per unit will change as per the volume accordingly price will get affected with the change in fixed cost per unit as the volume change as the price is the composition of variable cost, fixed cost & profit/ loss. | ||

Ans to Que 3 | ||

(B) Senstivity Analysis | ||

is a 'What if' technique that estimates profit or loss results if sales price , cost, volume or underlying assumptions change. | ||

Ans to Que 4 | Amount in $ | |

Sale price per unit | 40 | |

Variable cost per unit | 15 | |

Contribution per unit | 25 | |

No. Of units sold | 5000 | |

Total Contribution | 125000 | |

Less Fixed Cost | 10000 | |

(B) Operating Profit | 115000 |

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