Question

You are employed by ABC Ltd which manufactures specialist hydraulic seals for the aircraft industry. The
company has developed a new seal with the following budgeted data.
Variable cost per unit $
Direct materials 16
Direct labour 8
Variable overheads 8
32
The draft budget for the following years is as follows.
Production and sales 120,000 units
$
Fixed cost: Production 520,000
Administration 180,000
Selling, marketing and distribution 200,000
Contribution 1,680,000
Certain departmental managers within the company believe there is room for improvement on the
budgeted figures, and the following options have been suggested.
i) The sales manager has suggested that if the selling price was reduced by 5%, then an extra
15% units could be sold. The purchasing manager has indicated that if materials
requirement were increased in line, then a material price reduction of 3.25% could be
negotiated. With this additional output fixed production cost would increase by $15,000,
administration by $2,500 and selling, marketing and distribution by $5,000. Other costs
would remain unchanged.

ii)	The export manager has suggested that if the company increased overseas marketing by $7,500 then exports would increase from 7,500 units to 8,500 units. With this suggestion, distribution costs would increase by $6,000, and all other costs would remain unchanged. The marketing manager has suggested that if an extra $20,000 were spent on advertising,
iii)

the sales quantity would increase by 12.5%. The purchasing manager has indicated that in
such circumstances, material costs would reduce by $0.15 per unit. With this suggestion
fixed production costs would increase by $12,500, administrative by $2,000 and other
selling, marketing and distribution costs by $7,000. All other costs would remain unchanged.
iv) The managing director believes the company should be aiming for a profit of $568,000. He
asks what the selling price would be per unit if marketing were increased by $60,000, this
leading to an estimated increase in sales quantity of 35%. Other fixed costs would increase
by $77,000, whilst material prices would decrease by 6.50% per unit. All other costs would
remain unchanged.
Required
1) Taking each suggestion independently, compile a profit statement for options (i), (ii) and (iii),
showing clearly the contribution per unit in each case.

2) For suggestion (iv), calculate the selling price per unit as requested by the managing director.


3) Calculate the breakeven quantity in units if the managing director’s suggestion were
implemented.

Answer 1

Amounts are in $

Answer for first 2 parts is inserted as pictures

Part 3:

Total fixed cost if managers suggestion is followed = $1,037,000

Contribution per unit = 40.8674 - 14.96 - 8 - 8 = 9.9074

Breakeven point = Total fixed cost/Contribution per unit

= $1,037,000/$9.9074

= 104,669 units (rounded off)