Question

The income statement of XYZ Company for the 2016 financial year was below expectations
be low

Financia l Item	Total in TZS
Sales (40,000 units)	400,000,000
Cost of raw materials	80,000,000
Other variable costs	100,000,000
Fixed factory overheads	160,000,000
Fixed administrative overheads	30,000,000
Sales commission (3% sales value)	12,000,000
Variable delivery costs	20,000,000
Other fixed costs	30,000,000

a) What is the break-even point of the company?

b) The company proposes to reduce the selling price per unit by 10% and by doing so demand is expected to increase by 25%. What would be profit or loss if this proposal is implemented?

Answer 1

a) Contribution margin = 10,000 - 5300 = 4700

Break even point = Fixed costs/ Contribution margin per unit = 220,000,000 / 4700 = 46809 units (rounded off)

Workings:

Financial Item		Per unit
Sales	400,000,000	10000
Variable Costs
Cost of raw materials	80,000,000	2000
Other variable costs	100,000,000	2500
Sales commission (3% sales value)	12,000,000	300
Variable delivery costs	20,000,000	500
Contribution	188,000,000	4,700
Fixed costs:
Fixed factory overheads	160,000,000
Fixed administrative overheads	30,000,000
Other fixed costs	30,000,000
Total fixed costs	220,000,000
Net Income	-32,000,000

2.

Financial Item		Per unit
Sales	450,000,000	9000
Variable Costs
Cost of raw materials	100,000,000	2000
Other variable costs	125,000,000	2500
Sales commission (3% sales value)	13,500,000	270
Variable delivery costs	25,000,000	500
Contribution	186,500,000	3,730
Fixed costs:
Fixed factory overheads	160,000,000
Fixed administrative overheads	30,000,000
Other fixed costs	30,000,000
Total fixed costs	220,000,000
Net Income	-33,500,000