Question

IT Excel Sdn. Bhd., a manufacturing company that produces a computer component leases a building for RM250,000 per year for its manufacturing facilities. In addition, the machinery in this building is being paid for in installments of RM50,000 per year. Each unit of the product produced costs RM40 in labor and RM20 in materials. The variable costs are estimated at 60 percent of total revenue.

(a) Determine the price per unit of the product

(b) Calculate the quantity at which the manufacturer will cover the fixed costs.

(c)

i. How many units per year must be sold for the company to breakeven?

ii. Show that at breakeven point contribution margin is equal to average fixed costs.

iii. Can an increase in the overtime rate paid to staff lower down the breakeven point? Briefly explain.

(d)

i. Assuming demand is high and there is an increase in production and sales by 16,500 units above the breakeven quantity. Calculate the annual profit per unit.

ii. To increase profit further, the sales manager is recommending a 10% reduction in selling price which he believes will produce a 25% increase in the number sold each year.

(1) What is the change in average fixed costs?

(2) Calculate the percentage change in labor costs.

(3) Should this suggestion be implemented? Calculate to explain

Answer 1

(a) Determine the price per unit of the product

The price per unit of the product will be RM100.

(b) Calculate the quantity at which the manufacturer will cover the fixed costs.

The quantity at which the manufacturer will cover the fixed costs is 3,000 units.

(c)

i. How many units per year must be sold for the company to break even?

The units to be sold per year for the company to break even is 7,500 units.

ii. Show that at breakeven point contribution margin is equal to average fixed costs.

CM=RM40; AFC at BE = RM40; Therefore, MC=AFC=RM40.

iii. Can an increase in the overtime rate paid to staff lower down the breakeven point? Briefly explain.

No, an increase in the overtime rate paid to staff will not lower down the breakeven point. It would increase the fixed costs, for break-even, more should be produced and sold.

(d)

i. Assuming demand is high and there is an increase in production and sales by 16,500 units above the break-even quantity. Calculate the annual profit per unit.

The annual profit per unit will be RM27.50

ii. To increase profit further, the sales manager is recommending a 10% reduction in selling price which he believes will produce a 25% increase in the number sold each year.

(1) What is the change in average fixed costs?

The average fixed costs would decrease by RM2.50

(2) Calculate the percentage change in labor costs.

The percentage change in labor costs would be 25%.

(3) Should this suggestion be implemented? Calculate to explain

It should not decrease or reduce the price because profit will be declined by RM60,000.