Question

Quencher Limited is planning to produce mineral water. It is contemplating to purchase a plant with a capacity of 100,000 bottles a month. For the first year of operation the company expects to sell between 60,000 to 80,000 bottles. The budgeted costs at each of the two levels are as follows:

GHS

Particular 60,000 bottles 80,000 bottles

Material 360,000 480,000

Labour 200,000 260,000

Factory overheads 120,000 150,000

Administration expenses 100,000 110,000

The production would be sold through retailers who will receive a commission of 8% of sale price

Required

a) Compute the break-even point in GHS and units, if the company decides to fix the sales price at GHS16 per bottle.

b) Compute the break-even point in units, if the company offers a discount of 10% on purchase of 20 bottles or more, assuming that 20% of the sales will be to buyers who will avail the discount.

Answer 1

 

a)	Break Even (GHS) = Total Fixed cost / contribution margin ratio
	=120000/26.38%
	454,890
	Break Even (Units) = Total fixed cost / contribution per unit
	=120000/4.22
	28,436	Units
	Working Note: 1
	Particular	60000 Bottles	Per Bottle	80000 Bottles	Per Bottle
	Sales	960000	16	1280000	16
	Less: Variable cost
	Material	360000	6	480000	6
	Labour	180000	3	240000	3
	Factor Overhead	90000	1.5	120000	1.5
	Selling Commission	76800	1.28	102400	1.28
	Contribution margin	253200	4.22	337600	4.22
	Less: Fixed cost
	Labour	20000		20000
	Factory Overheads	30000		30000
	Admin Expense	70000		70000
	Net Income	133200		217600
	Contribution margin RATIO	26.38%		26.38%
	Working Note: 2 Calculate fixed and variable portion of Labor Cost
		Units Sold	Labor cost
	High LEVEL	80000	260000
	Low Level	60000	200000
	Change	20000	60000
	Change per unit (Variable cost) = Change in total cost / Change in Units Sold
	=60000/20000
	=3
	Fixed Cost calculation
	Variable Cost + Fixed cost = Total cost
	3 * 80000 + Fixed Cost = 260000
	Fixed Cost = 20000
	Working Note: 3 Calculate fixed and variable portion of Factory Overhead
		Units Sold	Factory OH
	High LEVEL	80000	150000
	Low Level	60000	120000
	Change	20000	30000
	Change per unit (Variable cost) = Change in total cost / Change in Units Sold
	=30000/20000
	=1.5
	Fixed Cost calculation
	Variable Cost + Fixed cost = Total cost
	1.5 * 80000 + Fixed Cost = 150000
	Fixed Cost = 30000
	Working Note: 4 Calculate fixed and variable portion of Admin Expense
		Units Sold	Admin
	High LEVEL	80000	110000
	Low Level	60000	100000
	Change	20000	10000
	Change per unit (Variable cost) = Change in total cost / Change in Units Sold
	=10000/20000
	=0.5
	Fixed Cost calculation
	Variable Cost + Fixed cost = Total cost