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Question 4 K Manufacturers has the following marginal income statement for 2019: Marginal income statement for...

Question 4

K Manufacturers has the following marginal income statement for 2019:

Marginal income statement for the year ended December 31, 2019

                                                                                               

Sales (300,000 units @ GH¢40)                                                                     GH¢12,000,000

Variable costs of goods sold (300,000 units @ GH¢24)                                       (7,200,000)

Manufacturing profit                                                                                              4,800,000

Variable selling and distribution cost (300,000 units @ GH¢2.4)                            720,000

Contribution                                                                                                            4,080,000

Fixed Cost                                                                                                              3,536,000

            Manufacturing cost                                                     GH¢2,160,000

            Selling and distribution cost                                                 500,000

            Administration costs                                                           876,000

Net profit                                                                                                                   544,000

Required

i. Calculate the company’s break-even quantity and the sales value for 2019.

ii. Calculate the number of units that have to be sold in 2019 if the company wishes to earn a net profit (after tax) of GH¢1,088,000 in 2020. Assume that the selling price, variable cost and total fixed costs are the same as those in 2019. Assume a tax rate of 25%.                                                                                                       

iii. Calculate the break-even quantity for 2020 if the fixed costs of the company increase by GH¢384,000 in order that the variable costs decrease by 40 pesewas per unit and a selling price increased to GH¢43.                                                             

Solutions

Expert Solution

2019:

Selling Price per unit = GH¢40
Variable Costs per unit = GH¢24 + GH¢2.40
Variable Costs per unit = GH¢26.40
Fixed Costs = GH¢2,160,000 + GH¢500,000 + GH¢876,000
Fixed Costs = GH¢3,536,000

Answer i.

Contribution Margin per unit = Selling Price per unit - Variable Costs per unit
Contribution Margin per unit = GH¢40 - GH¢26.40
Contribution Margin per unit = GH¢13.60

Contribution Margin Ratio = Contribution Margin per unit / Selling Price per unit
Contribution Margin Ratio = GH¢13.60 / GH¢40.00
Contribution Margin Ratio = 34%

Breakeven Quantity = Fixed Costs / Contribution Margin per unit
Breakeven Quantity = GH¢3,536,000 / GH¢13.60
Breakeven Quantity = 260,000

Breakeven Sales = Fixed Costs / Contribution Margin Ratio
Breakeven Sales = GH¢3,536,000 / 0.34
Breakeven Sales = GH¢10,400,000

Answer ii.

Net Profit = GH¢1,088,000
Profit before tax * (1 - 0.25) = GH¢1,088,000
Profit before tax = GH¢1,450,666.67

Required Sales Quantity = (Fixed Costs + Profit before tax) / Contribution Margin per unit
Required Sales Quantity = (GH¢3,536,000 + GH¢1,450,666.67) / GH¢13.60
Required Sales Quantity = 366,667

Answer iii.

Fixed Costs = GH¢3,536,000 + GH¢384,000
Fixed Costs = GH¢3,920,000

Variable Costs per unit = GH¢26.40 - GH¢0.40
Variable Costs per unit = GH¢26.00

Selling Price per unit = GH¢43.00

Contribution Margin per unit = Selling Price per unit - Variable Costs per unit
Contribution Margin per unit = GH¢43 - GH¢26
Contribution Margin per unit = GH¢17

Breakeven Quantity = Fixed Costs / Contribution Margin per unit
Breakeven Quantity = GH¢3,920,000 / GH¢17
Breakeven Quantity = 230,588


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