Question

Blue Shade wants to launch a new product called Shady Blue in the market. The sales manager needs to present the opportunity to management. He approaches you to assist him in calculating the required information.

He provides you with the following information.

Purchase price of the product R125,50/unit

Packaging cost    R10,00/unit

Labour needed to wrap the product before it can be delivered. (The product must be wrapped and cannot be sold without the wrapping) Wrap 2 products per hour. The employees will be paid R160 per day. The company work a 8 hour day. The employees will be utilised somewhere else for there are no products to be wrapped

A supervisor needs to be appointed at a monthly cost of R15,000.

Delivery cost to the wholesalers will be charged at R300 per 10 units delivered.

Additional space will be rented at R5,000 per month.

Additional general administration expenses will amount to R2,500 per month.

Required:

Assist the sales manager in calculating the following:

1. The estimated sales price per unit. The company’s policy is a mark-up of 65% on variable cost.

2. The contribution per unit.

3. Break-even units to be sold to cover the additional costs.

4. The number of units to be sold to achieve a profit before tax of 20% of the sales value.

5. The number of units to be sold to achieve a profit after tax of 15% of the sales value. The tax rate is 28%.

Answer 1

1. Given : Purchase price of product,i.e raw materials = R 125.50 per unit

Packaging cost = R 10.00 per unit

Labor cost = 160 per day It taken 1 hr to wrap 2 products hence in 8 hr per day ,16 products can be wrapped.

so Wrapping of 16 products = R 160

Wrapping of 1 product= 160/16 = R 10

Delivery cost per 10 units = R 300 so delivery cost per 1 unit = R 300/10 = R 30

So Total variable cost = 125.50 +10+10+30 = R 175.50

Total Fixed Cost = Rental cost +Admin Expenses+ Manager's salary

= 5000+2500+15000 = R 22500

As we know , Total cost = Total Fixed Cost + Total Variable cost

Total sales price = Total cost +Variable Cost * Markup percentage = (Total cost + Variable cost X 65/100)

So assume 100 units of products are produced

For 100 Units , total variable cost = 175.50 x 100 = R 17500

Therefore Total cost for producing 100 units = Fixed cost + Variable cost = 22500+17500= 40000

Sales price for 100 units of products = Total cost + Markup percentage (Variable cost )

= 40000+.65 x 17500

= R 51375

Therefore sales price per unit = 51375/100 = R 513.75

2. Total contribution per unit = Unit sales price - Unit variable cost

= 513.75 - 175.50 = R 338.25

You should understand that unit contribution margin is the amount each unit sale adds to profit.

3.Breakeven units to be sold to cover additional costs

To achieve breakeven means, total revenue required to be generated to cover the fixed costs .

Breakeven Point per unit = Fixed Costs / (Sales price per unit - Variable cost per unit )

= 22500 / (513.75-175.50)

= 66.51 i.e approximately 67 units

Therefore Blue Shade should sell at least 67 units to cover the additional costs .

4. As we know Total Profit = Total Sales - Total costs  

Unit sales = (Fixed costs + Profits )/ ( Selling price per unit - Variable cost per unit )

Total profit = {(Sales price per unit x No of units sold) - (Variable cost x No of units sold) - Fixed costs }

Let no of units sold = k

20/100 x 513.75 x k = 513.75 k - 175.50k - 22500

22500 = 338.25 k - 20/100 x 513.75 k

k = 22500 / 235.5 = 95.54 or 96 units

Therefore 96 units should be sold to achieve profit of 20 % of sales value .