Question
In: Accounting
Mary Poppins, a friend of yours, has recently set up a small business making curtains. She...
Mary Poppins, a friend of yours, has recently set up a small business making curtains. She has supplied you with the following figures, and has asked your advice on a number of issues:
|
Costs per month |
R |
|
Materials |
4 100 |
|
Labour |
5 000 |
|
Production overheads |
2 000 |
|
Selling and distribution overheads |
1 000 |
|
Administration overheads |
500 |
The above costs are based on producing and selling 1 200 pairs of curtains per month at a selling price of R15 each.
80% of labour costs are fixed, as are 75% of production overheads, 60% of selling and distribution overheads, and 100% of administration overheads. All other costs vary directly with output.
Mary wants to know:
- How much profit she will make at the proposed production level and selling price?(3)
b) How many pairs of curtains she needs to sell to break even at this price? (3)
c) If sales are slower than expected, by how much can she reduce her selling price in order to maintain the budgeted level of sales without making a loss? (4)
d) Mary estimates her maximum capacity as 1 500 curtains: would it be worthwhile to drop the price in order to increase sales to capacity? If so, by how much? (5)
e) If Mary bought another machine, she could increase her production capacity to 2 500 curtains. Repayments on the machine would be R700 per month, and she would need an extra member of staff, costing R1 000 per month. She would also have to pay a bonus to all staff of 50 cents per pair of curtains, over and above their current wages, and variable production overheads would increase by 30 cents per pair of curtains.
In order to increase sales, she would have to reduce the price: she estimates demand at different price levels to be as follows:
|
Price |
Estimated monthly demand |
|
R14 |
1 500 |
|
R13 |
2 000 |
|
3R12 |
2 500 |
What would be the optimum price? (10)
Required:
Advise Mary on each of the above points, showing your calculations, explaining both the financial and non-financial implications of each where appropriate.
Solutions
Expert Solution
| Particulars | Amount ( in R) | Fixed | Variable |
| Materials | 4100 | 0 | 4100 |
| Labour | 5000 | 4000 | 1000 |
| Production Overheads | 2000 | 1500 | 500 |
| Selling and Distribution Overheads | 1000 | 600 | 400 |
| Administration Overheads | 500 | 500 | 0 |
| 6600 | 6000 | ||
| Current Selling Units | 1200 Pairs | ||
| Current Selling Price per Pair | R 15 Each Pair | ||
| a) | |||
| Current Selling Unit X Current Selling Price | |||
| Selling Value 1200 X 15R = | 18000 | ||
| Variable Cost | |||
| Material | 4100 | ||
| Labour | 1000 | ||
| Production Overheads | 500 | ||
| 12400 | |||
| Indirect Cost | |||
| Labour ( Fixed) | 4000 | ||
| Production Overheads ( Fixed) | 1500 | ||
| Selling Overhead | 1000 | ||
| Admin Overhead | 500 | ||
| Profit | 5400 |
| b) Breakeven Point, where Profit = Zero, able to cover it cost only | |||||
| Selling Price | 15 R | ||||
| Variable Cost | 6000/1200 | 5 R | |||
| Contribution Per Unit | 10 R | ||||
| Fixed Cost | 6600 | ||||
| So, Break Even Equation | |||||
| Contribution = Fixed Cost + Profit | |||||
| Where Profit is Zero | |||||
| 10 R X Sale Units = 6600 + 0 | |||||
| 660 Units ( Pair of Curtains) |
| c) It means , Price is reducing only to maintian the budgeted level of sale | |||||||
| Let Suppose price of Pair of Curtain be X | |||||||
| So , Sale Value = 1200 X | |||||||
| Variable Cost | 6000 | ||||||
| Contribution | 1200 X - 6000 | ||||||
| Fixed Cost | 6600 | ||||||
| Profit | Zero | As Assumed making profit NIL, it means not incurring loss | |||||
| So, | |||||||
| 1200 X - 6000= 6600+ 0 | |||||||
| X = 6000+6600 / 1200 | |||||||
| X = 10.5 R | |||||||
| Hence Reduction in price is upto 15 R - 10.5 R = 4.5 R |
| d) So, In Order to increase the capacity to 1500 | ||||||
| So inorder to Increase the production Variable Cost is | ||||||
| 6000 X 1500 / 1200 = 7500 R | ||||||
| Fixed Cost remain Same as 6600 R | ||||||
| In order to increase the Sale , Budgeted Profit needs to be remain constant | ||||||
| So, Sale Value = 1500 X | ||||||
| Variable Cost | 7500 R | |||||
| Contribution | 1500 X - 7500 R | |||||
| Fixed Cost | 6600R | |||||
| Profit | 5400 R | |||||
| So, | ||||||
| 5400 R = 1500 X - 7500 R - 6600 R | ||||||
| X = 13 R | ||||||
| Hence Rduction in price is upto 15 R - 13R = 2 R |
e)
| R14 | R13 | R12 | |
| Selling Units | 1500 | 2000 | 2500 |
| Sale Value | 21000 | 26000 | 30000 |
| Variable Cost | 7500 | 10000 | 12500 |
| Variable Overhead ( Bonus) | 188 | 250 | 313 |
| Total Variable Cost | 7688 | 10250 | 12813 |
| Conribution | 13313 | 15750 | 17187 |
| Fixed Cost | 6600 | 6600 | 6600 |
| Other FC | 700 | 700 | 700 |
| Staff Bonus | 3125 | 4167 | 5209 |
| Total FC | 10425 | 11467 | 12509 |
| Profit |
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business making curtains. She has supplied you with the following
figures, and has asked your advice on a number of issues:
Costs per month
R
Materials
4 100
Labour
5 000
Production overheads
2 000
Selling and distribution overheads
1 000
Administration overheads
500
The above costs are based on producing and selling 1 200 pairs
of curtains per month at a selling price of R15 each.
80%...
Mary Poppins, a friend of yours, has recently set up a small business making curtains. She...Mary Poppins, a friend of yours, has recently set up a small
business making curtains. She has supplied you with the following
figures, and has asked your advice on a number of issues:
Costs per month
R
Materials
4 100
Labour
5 000
Production overheads
2 000
Selling and distribution overheads
1 000
Administration overheads
500
The above costs are based on producing and selling 1 200 pairs
of curtains per month at a selling price of R15 each.
80%...
Mary Poppins, a friend of yours, has recently set up a small business making curtains. She has supplied you with the following figures, and has asked your advice on a number of issues:
Mary Poppins, a friend of yours, has recently set up a small business making curtains. She has supplied you with the following figures, and has asked your advice on a number of issues:
Costs per month
R
Materials
4 100
Labour
5 000
Production overheads
2 000
Selling and distribution overheads
1 000
Administration overheads
500
The above costs are based on producing and selling 1 200 pairs of curtains per month at a selling price of R15 each.
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