Problem 5 (CVP Analysis used for Decision Making)

Kelly Products Corporation produces a chemical compound which deteriorates and must be discarded if it is not sold by the end of the month during which it is produced.

The total variable cost of the manufactured compound is P25 per unit, and it is sold for P40 per unit. The compound can be purchased from a competitor at P40 per unit plus P5 freight per unit. It is estimated that failure to fill orders would result in the complete loss of 8 out of 10 customers placing orders for the compound.

The corporation has sold the compound for the past 30 months. Demand has been irregular and there is no sales trend. During this period sales per month have been:

Units Sold per Month

4,000

5,000

6,000

Number of Months

6

15

9

*Show your solutions and give an analysis for each requirement below.

Required:

1. For each of the following, [prepare] a schedule of the

a. Probability of sales of 4,000, 5,000, or 6,000 units in any month.

b. Contribution margin if sales of 4,000, 5,000, or 6,000 units are made in one month and 4,000, 5,000, or 6,000 units are manufactured for sale in the month; i.e., nine possible combinations of units sold and units manufactured. Assume all sales orders are filled.

c. Average monthly contribution margin that the corporation should expect over the long run if 5,000 units are manufactured every month and all sales orders are filled.