Question

National Aluminum Products Company is a state owned enterprise. Its main product is PVC pipes manufactured through extrusion process. The company is catering for the needs of the country for PVC articles, particularly in sanitary work. The company has just enhanced its capacity to 450 units per day. The average selling price of PVC pipes is computed to be OMR 25 per unit. Given below is the company’s last year revenue and cost information:

	OMR
Revenue	1875000
Direct material	562500
Indirect material	14000
Direct labor	281250
Indirect labor	8600
Transportation of sold units	12500
Salaries of management staff	375000
Insurance	26000
Marketing	16500
Building rent and dep	24000
Utilities (Electricity & Water)	15800
Cleaning and maintenance	5000
Total cost	1341150
Operating income	533850
VAT Tax @ 30%	160155
Net Income	373695

a) Compute the break-even point for last year.

b) Assume that if the company spends 23000 OMR on additional marketing, the company can sell the unit at 5% higher price. Keeping other cost pattern the same, what will be the new break-even point?

c) Assume that there are 260 working days in a year, what will be the after tax profit, if the company operates at its full capacity?

d) How many units the company must sell, if the management sets the next year target an after tax profit of OMR 480,000?

e) What will be the margin of safety, if the company is able to sell its full capacity?

Answer 1

PARTICULAR	OMR	A. RATE (Quantity 75000)	B. New Rate
Revenue	1875000	25 (SP)	26.25 (SP)
Direct Material	562500
Indirect Material	14000
Direct Labour	281250
Indirect Labour	8600
Transportation	12500
Total Variable cost	878850	11.718 (VC)	11.718 (VC)
Salaries	375000		375000
Insurance	26000		26000
Marketing	16500		16500
Building Rent & Dep	24000		24000
Utilities	15800		15800
Cleaning & Maint	5000		5000
Additional Marketing			23000
Total Fixed cost	462300		485300

a. Break even point = Quantity at which profit = 0

i.e Contribution = (SP - VC) * Quantity = Fixed cost

Thus BEP Quantity = Fixed cost / (SP-VC) = 462300/ (25-11.718) = 34807

b. New Breakeven point = Fixed cost / (SP-VC) = 485300/ (26.25-11.718) = 33395

c. Total production in a year = 260 days*450 units = 117000 units in a year

Profit before tax = Contribution - Fixed cost = (25-11.718)*117000 -462300= 1091694

Profit after tax (PAT) = 1091694*70% = 764186

d. PAT+Tax = PBT + Fixed cost = Contribution = Quantity (SP-VC)

PBT = 480000+480000/70*30/100 = 685714

Contribution = 685714 + 462300 = 1148014

Contribution = 1148014 = Quantity (SP-VC) = Quantity (25-11.718)

Quantity = 1148014 / (25-11.718) = 86434

e. Margin of safety = (Current sales - breakeven sales)/Current sales *100

= (117000 - 34807)/ 117000 = 70.25%