Question

The Jerry Company produces product X. Each product sells for RM20.00. Unit costs are as follows:
RM
Direct material 3.90
Direct labour 1.40
Variable factory overhead 2.10
Variable selling and administrative expenses 1.60

Total fixed factory overhead is RM70,000 per year and total fixed selling and administrative expense is RM100,000. During the recent year, 20,000 units were sold.

Required:
a) Calculate the variable cost per unit, total fixed cost and the contribution margin per unit.


b) Calculate the breakeven point in units and in ringgit.                                            

c) Calculate the margin of safety in units for the recent years.                                  

d) Prepare Jerry’s current year income statement.                                                    

e) How many units Jerry should sell in order to earn a profit of RM100,000?           
(Total: 15 Marks)

Answer 1

a) Computation of variable cost per unit, total fixed cost and the contribution margin per unit:

Variable cost per unit = Direct Material per unit + Direct labor per unit + Variable factory overhead per unit + Variable selling and administrative expenses

Therefore, Variable cost per unit = 3.9 + 1.4+ 2.10 + 1.60 = RM 9

Total Fixed Cost = Total fixed factory overhead + total fixed selling and administrative expense

Therefore, Total Fixed Cost = 70,000 + 100,000 = RM 170,000

Contribution Margin per unit = Selling price per unit - Variable cost per unit

Therefore, Contribution Margin per unit = RM 20 - RM 9 = RM 11

b) Computation of break even points:

Break Even points (Units) = Total Fixed Cost/Contribution per unit

Therefore, Break Even points (Units) = 170,000/11 = 15,454.55 or 15,455 units.

Break Even points (RM) = Break Even units * Selling price per unit

Therefore, Break Even points (RM) = 15,455*20 = RM 309,100

c) Margin of safety ratio (units) = (Current Sales(units) - Break Even point(units)) / Current Sales *100

Therefore, Margin of safety ratio = (20,000 - 15,455)/20,000 * 100 = 22.725%

d) Computation of Jerry’s current year income statement:

e) Computation of units Jerry should sell in order to earn a profit of RM100,000:

In order to earn profit of RM 100,000, total contribution required = Fixed Cost + RM100,000

Therefore, total contribution required = RM 170,000 + RM 100,000 = RM 270,000

Units needed to sale to earn required contribution = Required contribution / Contribution per unit

Therefore, Units needed to sale to earn required contribution = RM 270,000/RM 11 = 24,545.45 or 25,456 units

Therefore, 25,456 units Jerry should sell in order to earn a profit of RM100,000