Question

Question 3

Beta Shoes Sdn Bhd (BSSB) has been established since year 2018 and specialised in men shoes. The following details to BSSB which currently sells 30,000 pairs of shoes annually.
RM
Selling price per pair of shoes 320.00
Variable cost per pair of shoes 100.00
Total annual fixed costs:
    Salaries 900,000
    Advertising 350,000
    Other fixed expenses 380,000

Required:
Answer each part independently of data contained in other parts of the requirement:
a) Calculate the break-even point and margin of safety in number of pairs of shoes sold.


b) Based on sales of 50,000 pairs of shoes, calculate BSSB’s net profit/loss.                                                                                                 
  
                       
c) If direct material increases by RM15.00 per pair of shoes, how many pairs of shoes would need to be sold in a year in order to earn a net income of RM2,500,000?  


d) Assume that for next year, an additional advertising campaign costing RM80,000 is proposed, whilst at the same time selling price is to be increased by 10%. What would be the break-even point in number of pairs of shoes?                                                

e) Name TWO (2) approaches to break-even analysis. Briefly explain how each approach works.                                                                                                                    
(Total: 25 Marks)

Answer 1

a)	Break even point =	Fixed Costs/Contribution per unit
	Fixed costs =	1630000
	Contribution per unit =	Selling price per unit - Variable cost per unit
	=	220
	Therefore, Break even point =	7409	pairs
	Margin of Safety =	Total Sales - Break even point
	=	30000 pairs - 7409 pairs
	=	22591	pairs
b)	Particulars	Per pair	No of pairs	Total
	Sales	320	50000	16000000
	Variable cost	100	50000	5000000
	Contribution	220	50000	11000000
	Fixed Costs			1630000
	Net Profit			9370000
c)	Required Net income	=	2500000
	Particulars	Per pair
	Selling price	320
	Variable cost	115
	Contribution	205
	No of pairs required	=	(Target Profit + Fixed Cost)/Contriution per unit
		=	20146	pairs
d)	Break even point if advertising cost of RM 80000 is incurred and selling price
	increased by 10%.
	Selling price per pair=	352
	variable cost=	100
	Contribution=	252
	Fixed Costs=	1710000
	Break even point=	6786	pairs
c)	Break even analysis can be done in per unit method as well as total sales method.

One method includes identifying the company’s fixed costs and variable costs, and then combining both into one total cost line. The break-even point occurs when this total cost line intersects the company’s revenues. The other method focuses on the company’s profit contribution, which is simply a per-unit measure of profit on each sale of a given product.