Question

RantauBags Company plans to sell 10,000 handbags at RM400 each in the coming year. Data on cost per handbag are as follows:

Direct materials	RM80
Direct labour	RM125
Variable overhead	RM15

Variable selling expense is a commission of 5 percent of the sales price. Total fixed factory overhead amounts to RM800,000. Fixed selling and administrative expense totals RM400,000.

Required:

1. Prepare a contribution margin income statement for RantauBags for the coming year.

2. What is the effect on RantauBags operating income if 13,000 units are manufactured and sold next year? Show computation.

3. Calculate the number of units RantauBags must sell in order to breakeven.

4. Calculate the number of units RantauBags must sell to achieve a target operating income of RM240,000.

5. Calculate the margin of safety in sales (RM) for the coming year.

6. Discuss TWO benefits of manager’s possessing the knowledge/understanding on cost-volume-profit analysis.

Answer 1

	A	Contribution Margin Income Statement (10000Units)		PU	B	Contribution Margin Income Statement (13000Units)
		Sales	40,00,000	400.00		Sales	52,00,000
		Less: Variable Expense				Less: Variable Expense
		Direct Material	8,00,000	80.00		Direct Material	10,40,000
		Direct Labor	12,50,000	125.00		Direct Labor	16,25,000
		Variable Overhead	1,50,000	15.00		Variable Overhead	1,95,000
		Gross Contribution	18,00,000	180.00		Gross Contribution	23,40,000
		Less: Sales Commission(5%of Sales)	2,00,000	20.00		Less: Sales Commission(5%of Sales)	2,60,000
		Net Contribution	16,00,000	160.00		Net Contribution	20,80,000
		Less: Period Expense				Less: Period Expense
		Factory Overhead	8,00,000			Factory Overhead	8,00,000
		Selling & Admin Expense	4,00,000			Selling & Admin Expense	4,00,000
		Net Operating Income	4,00,000			Net Operating Income	8,80,000
	C	Break Even Units:
		Fixed Expense	12,00,000
		Net Contribution PU	160
		Break Even Units	7,500
	D	Target Income	2,40,000
		Add: Fixed Expense	12,00,000
		Required Contribution	14,40,000
		Net Contribution PU	160.00
		Required Unit to be Sales	9,000
	E	Margin of Safety:
		Actual Sales	40,00,000
		Less: Break Even Sales	30,00,000	(7500*400)
		Margin of Safety	10,00,000