Question

QUESTION ONE                                                                                                                    [20]

Deshi Industries plans to manufacture gas stoves and the following information is applicable:

Estimated sales for the year	3 000 units at R 450 each
Estimated costs for the year:
Variable costs	R320 per unit
Factory overheads (all fixed)	R80 000
Administrative expenses (all fixed)	R30 000

1.1       Calculate the:

1.1.1 Total operating profit for the estimated figures.                                                 (4)

1.1.2 Break-even quantity                                                                                                       (3)

1.1.3 Break-even value                                                                                                           (3)

1.1.4 Margin of safety in units.                                                                                                (3)

1.1.5 Target sales volume to achieve a profit of R50 000.                                                     (3)

1.2       The sales manager is of the opinion that a greater profit will be made if the selling price is decreased by 10% as sales volume will then increase by 10%. Calculate the total operating profit at the new selling price and advice management whether to implement this suggestion.                                                                                                                                     (4)

Answer 1

(1.1)

total operating profit

Particular	Per unit	Amount
Sales	450	1,350,000
less variable costs	320	960,000
contribution margin (sales - variable cost)	130	390,000
less fixed cost
factory overhead		80,000
administrative overhead		30,000
total fixed cost		110,000
operating profit (contribution margin-fixed cost)		280,000

(1.1.2)

break even quantity = fixed cost/contribution per unit

break even quantity = 110,000/130

break even quantity = 846.15

(1.1.3)

break even value = break even quantity * price per unit

break even value = 846.15 * 450 = 380,767.5

(1.1.4)

margin of safety in units= actual sale quantity - break even sale quantity

margin of safety = 3000 - 846.15

margin of safety = 2153.85

(1.1.5)

desired profit = 50,000

desired sale = (fixed cost + desired profit)/contribution per unit

desired sales = (110,000 + 50,000)/130 = 1230.77

hence desired sales = 1230.77

(1.2)

new selling price = 450 - 10%

new selling price = 405

new selling quantity = 3000 + 10%

new selling quantity = 3000+10%

new selling quantity = 3300

Particular	Per unit	Amount
Sales	405	1,336,500
less variable costs	320	1,056,000
contribution margin (sales - variable cost)	85	280,500
less fixed cost
factory overhead		80,000
administrative overhead		30,000
total fixed cost		110,000
operating profit (contribution margin-fixed cost)		170,500

as the operating profit is decreasing from 280,000 to 170,500. Hence the decision should not be implemented.