Compute the margin of safety at the current level.

(a) Despite its usefulness in profit planning, cost control and decision making, cost-volume-profit (C-V-P) analysis lies on premises that are unrealistic.

Required: Outline four assumptions underlying C-V-P analysis.(4 marks)

(b) LIQUID Enterprises Limited deals in the bottling of drinking water. The Management Accountant has submitted the following statement for the period ended 31 October 2019.

Sales (4,000 units) 40,000

Less cost:

Direct Materials 14,000

Direct Wages 10,000

Direct Expenses 6,000

Fixed Overheads 4,000 34,000

Net Profit 6,000

Management is in the process of preparing plans for the year 2020.


Compute the following to provide sufficient information to management to support their planning process:

(i) The current break even sales volume.(3 marks)

(ii) The margin of safety at the current level.(2 marks)

(iii) Management plans for a net profit of Shs 10 million over the next period. What sales volume will make management achieve that level of profit?(3 marks)

(iv) If sales volume and price are expected to remain the same, but management still plans to earn net profit of Shs 10 million, by what percentage should they reduce variable costs?(4 marks)

(v) If management double output, how much net profit will they earn?(4 marks)

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