Question

Moon (Ltd) manufacture specially treated garden benches. The following information was extracted from the budget for the year ended 29 February 2016:

Estimated sales for the financial year 2 000 units

Selling price per garden bench R450

Variable production cost per garden bench:

- Direct material - R135

- Direct labour -R90

- Overheads -R45

Fixed production overheads R127 500

Selling and administrative expenses:

- Salary of sales manager for the year - R75000

- Sales commission-10% of sales

Required: (round off answers to the nearest rand or whole number)

3.1 Calculate the break-even quantity.

3.2 Determine the break-even value using the marginal income ratio.

3.3 Calculate the margin of safety (in Rand terms).

3.4 Determine the number of sales units required to make a profit of R150 000.

3.5 Suppose Moon (Ltd) wants to make provision for a 10% increase in fixed production costs and an increase in variable overhead costs of R15 per unit. Calculate the new break-even quantity.

Answer 1

Income Statement of Moon Ltd.
Particulars	Quantity	Price	Amount in Rand Terms
Sales	2,000	450	900,000
Less: Variable Cost
Direct Material	2,000	(135)	(270,000)
Direct Labor	2,000	(90)	(180,000)
Overheads	2,000	(45)	(90,000)
Sales Commission(10% of sales)	2,000	(45)	(90,000)
Contribution		135	270,000
Less: Fixed Overheads	2,000	(64)	(127,500)
Less: Salary of Sales Manager	2,000	(38)	(75,000)
Profit	2,000	34	67,500
1. Calculation of Break Even Quantity
(Total Fixed Costs/ Contribution per unit)
Total Fixed Costs	202,500
Contribution per unit	135
Break Even (In Quantity)	1,500
2. Calculation of Break Even Value
(Total Fixed Costs/ Margin Income Ratio)
Total Fixed Costs	202,500
Margin Income Ratio	30%
Break Even (In Value)	675,000
3. Calculation of Margin of Safety (In Rand Terms)
Actual Sales	900,000
Less: Break Even Sales	(675,000)
Margin of Safety (In Rand Terms)	225,000
4. Calculation of Sales at Desired Profits
Particulars	Rand Terms
Total Fixed Costs	202,500
Desired Profits	150,000
Desired Contribution	352,500
Margin Income Ratio	30%
Desired Sales Value	1,175,000
5. Calculation of New Break Even Quantity
Revised Production Overheads	140,250
Salary of Sales Manager	75,000
Total Revised Fixed Costs	215,250
Revised Contribution per unit(135-15)	120
Break Even (In Quantity)	1,794