Question

A summary of a manufacturing company’s budgeted profi t statement for its next financial year, when it expects to be operating at 75 per cent of capacity, is given below. £ £ Sales 9,000 units at £32 288,000 Less: direct materials 54,000 direct wages 72,000 production overhead – fixed 42,000 – variable 18,000 186,000 Gross profit 102,000 Less: admin., selling and dist’n costs: – fixed 36,000 – varying with sales volume 27,000 63,000 Net profit 39,000 It has been estimated that: (i) if the selling price per unit were reduced to £28, the increased demand would utilise 90 per cent of the company’s capacity without any additional advertising expenditure; (ii) to attract suffi cient demand to utilise full capacity would require a 15 per cent reduction in the current selling price and a £5,000 special advertising campaign. You are required to : (a) calculate the breakeven point in units, based on the original budget; (b) calculate the profits and breakeven points which would result from each of the two alternatives and compare them with the original budget.

Answer 1

a)

Calculation of variable cost per unit at 9,000units

Particulars	Per unit	Amount$
Direct material	6	54,000
Ditect labor	8	72,000
Production overhead	2	18,000
Admin and selling	3	27,000
Total	19	1,71,000

Contribution margin per unit=selling price – variable cost per unit

                                                    =32-19

                                                     =13$

Break even point=Fixed cost/contribution margin per unit

(42,000+36,000)/13$=6,000units

Break even point $=6,000units*32$

                                  =1,92,000$

b)

selling price at alternative 1=28$ and sales units (9,000units*90/75)=10,800units

selling price at alternative 2=32*(100-15)%=27.2$ and sales units 9,000units*100/75=12,000units

particulars	Alt 1	Alt 2
sales units	10,800	12,000
selling price	$28	$27.20
sales $	3,02,400	3,26,400
less:
Direct material @6	-64,800	-72,000
Direct wages @8	-86,400	-96,000
production overhead
variable@2	-21,600	-24,000
fixed	42,000	42,000
Gross profit	87,600	92,400
less:
Admin and selling
variable@3	32,400	36,000
fixed	36,000	41,000
Net profit	19,200	15,400

Break even point in alternative 1 is

Break even point=Fixed cost/contribution margin per unit

(42,000+36,000)/28-19$=8,667units

Break even point in alternative 2 is

Break even point=Fixed cost/contribution margin per unit

(42,000+36,000+5,000)/27.2-19$=10,122units

conclusion:

compared with two alternatives original budget is best because of less BEP,and HIGHER NET PROFIT