14 Aug Accounting A1
1- Explain the concept of contribution and the use of the concept in cost–volume–profit (CVP) analysis.
2- Discuss how companies use the information from cost-volume-profit analysis in making decisions.
3- Vet Services is a specialist laboratory carrying out tests on cattle to ascertain whether the cattle have any infection. At present, the laboratory carries out 12,000 tests each period but, because of current difficulties with the beef herd, demand is expected to increase to 18,000 tests a period, which would require an additional shift to be worked.
The current cost of carrying out a full test is:
Materials
$115/test
Technicians ’ wages
$30/test
Variable overhead
$12/test
Fixed overhead
$50/test
The following items are required to work on an additional shift would:
i. Require a shift premium of 50 per cent to be paid to the technicians on the additional shift;
ii. Enable a quantity discount of 20 per cent to be obtained for all materials if an order was placed to cover 18,000 tests;
iii. Increase fixed costs by $700,000 per period.
The current fee per test is $300.
Required:
a. Calculate the profit for the period at the current capacity of 12,000 tests.
b. Complete the following items to derive the period profit based on the profit statement framework assuming the additional shift was worked and 18,000 tests were carried out.
Income Statement Items
$
Sales
Direct materials
Direct labor
Variable overhead
Fixed costs
Profit
a. Assuming the following costs are incurred for a capacity of 15,000 tests per period. Calculate the breakeven number of tests at this capacity level.
Test fee
$300
Variable costs per test
$140
Period fixed costs
$1,200,000
b. Provide discussions on how the above information is relevant to your work in formulating management decisions.
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