In: Accounting
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.
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