Question

Question 1
James Bond Sdn Bhd produces a type of toy which is sold for RM110 per unit. The normal annual production and sales for the toys are 1,600 units, although the company has the capacity to produce up to 2,000 units.

The following data consist of costs incurred during the year ended 2016:

RM
Material (100% variable) 40,000
Labour (60% variable) 40,000
Variable selling expenses 12,800
Fixed selling expenses 25,000
Fixed administrative expenses 20,000

The management accountant of the company is proposing the following alternatives to increase sales for the year 2017 and to reduce the idle capacity:

1. Reducing the selling price to RM100 per unit which would lead to an estimated increase in the sales volume by 20%.
2. An increase in sales would result in an increase of variable labour cost per unit by 10%.
3. Fixed selling expenses is also expected to increase to RM27,500 due to an aggressive advertising campaign planned to boost sales.

Required:

a) Determine the following costs in year 2016:
i. Total variable costs per unit.                                                                       
ii. Total fixed costs.                                                                                       

b) Calculate the following in year 2016:
i. Break-even points in units and value.                                                          
ii. Margin of safety in units and value.                                                           
iii. The expected sales value if the company targets for a profit of RM60,000.


c) Advice the management of James Bond Sdn Bhd if the company should implement the proposed alternative for year 2017. (Show profit comparison)

Answer 1