Question

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) Contirbution margin = Selling price - Variable cost

= 320 - 100

= RM220

Total fixed cost = 1,630,000

Breakeven = Fixed cost / Contribution margin

= 1,630,000/220

= 7,409 units

Total sales = 30,000

Margin of safety sales = Total sales - Breakeven sales

= 30,000 - 7,409

= 22,591 units

B) Sales = 50,000 units

Total contribution = 50,000*220

= RM11,000,000

Total fixed cost = 1,630,000

Net profit

= 11,000,000 - 1,630,000

= RM9,370,000

C)

Direct material price increase by RM15

Contribution margin = 220 - 15

= RM205

Expected net profit = 2,500,000

Fixed cost = 1,630,000

Units to be sold = (Expected profit + Fixed cost )/ Contribution margin

= (2,500,000 + 1,630,000) / 205

= 20,146 units

D)

Fixed cost = 1,630,000 + 80,000

=RM 1,710,000

Selling price = 320 + 10%*320

=RM 352

Variable cost = 100

Contribution margin = 352 - 100

= RM252

Breakeven

= 1,710,000/252

= 6,786 units

E)

First approach is Profit contribution approach in which profit per unit is calculated and then the break even sales are calculated from the profit. This approach requires us to calculate contribution margin per unit which will be selling price minus the variable cost, and then breakeven sales will be calculated.

Second approach is total cost method where Fixed cost and variable cost are combined to calculate the total cost and then the intersection point of total cost with the total revenue on graph will give us breakeven point.

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