Question

Gideon Manufacturers commenced business on 02 January 2020, manufacturing plastic chairs. However, later in the year the management and investors decided to discontinue the manufacture of chairs with effect from 01 February 2021 and to start to manufacture tables instead. The budget preparation for 2021 has already commenced and the forecasts for January and February 2021 are available. Use the forecasts to undertake a CVP Analysis for January 2021 and prepare an income statement using absorption costing method for February 2021.

QUESTION 1

REQUIRED:

Use the information provided below to answer each of the following question independently.

1.1 Calculate the break-even value using the marginal income ratio.

1.2 The sales manager proposes a R2 per unit reduction in selling price with the expectation that this would increase sales by 2 000 units . Is this a good idea? Motivate your answer.

1.3 Determine the selling price per unit if a net profit of R486 000 is desired.

INFORMATION

The following forecasts for January 2021 were provided by Gideon Manufacturers :

Sales (36 000 units)	R1 080 000
Direct materials cost per unit	R8
Direct labour cost per unit	R5
Variable manufacturing overhead costs per unit	R2
Fixed manufacturing overheads	R150 000
Fixed marketing and administrative costs	R120 000
Sales commission	10% of sales

QUESTION 2

REQUIRED

Prepare the Income Statement of Gideon Manufacturers for the month ended 28 February 2021 using the absorption costing method.

INFORMATION

The following forecasts were obtained from the accounting records of Gideon Manufacturers for the month ended 28 February 2021:

Inventory on 01 February 2021	NIL
Production	25 000 units
Sales	23 000 units

Selling price per unit	R100
Manufacturing costs :
Fixed manufacturing costs	R240 000 per month
Variable manufacturing costs per unit	R42
Marketing costs:
Sales personnel's salaries and advertising	R40 000 per month
Delivery costs	R5 per unit sold
Administrative costs :
Salaries	R50 000 per month
Other office costs	R4 per unit sold

Answer 1

Given,

Sales unit = 36,000, sales value 1,080,000

Price per unit = 1,080,000/36000 or, R30

Calculation of Margin per unit = Sales per unit - variable cost per unit

Direct material R8   

+ Direct Labour R5

+ Variable Overhead (OH) R2

+ Sales commission R3

Total variable cost R18

Therefore, Margin per unit = R30 - R18 or, R12 and total margin = (R12* 36,000) or, R432,000 point 1

Marginal Income ratio = (Margin/ sales) * 100% or, (R12/R30) * 100% or, 40%

1.1) Break-Even value = total fixed cost/Marginal Income ratio

or, Fixed manufacturing overheads R 150,000

  + Fixed marketing and administrative costs R 120,000

Total fixed cost R 270,000

Break Even value = R270,000/40% or, R675,000

1.2) As per manager suggestion if sales price reduces by R2 the sale unit would increase by 2000 unit and new sale price per unit will be R30 - R2= R28 and new total sale value = R28 * 38,000 units or 10,64,000

(considering previous sale price 30 and reduction of R2 per unit)

and variable cost per unit will be

Direct material R8   

+ Direct Labour R5

+ Variable Overhead (OH) R2

+ Sales commission R2.8 ( 10% of new sales price per unit)

Total variable cost R17.8

new margin per unit will be R28 - R 17.8 or, 10.2

and total margin will be = R10.2 * 38000 or, R387,600   

We can see in the point 1 or as per current situation the total Margin is R432,000 but by reducing sales price R2 per unit total Margin reduce to R387,600 as there is no change in fixed cost this will reduce our profit. Hence the idea is not good to be consider.

1.3) if the net profit of R486,000 is desired at current volume 36000 the sale price per unit should be as

desired profit = Total margin - Total fixed cost

or Desired profit - Total fixed cost = Total margin

or, R486,000 - R270,000 = Total margin

or, (R486,000 + R270,000) = 756,000

Total Margin should be 756,000 for desired profit, at the current sales volume of 36,000 this require margin per unit of 756,000/36,000 = 21.

thus, sales price per unit should be margin + variable cost or 21+ (15 + 10% commission of sale price)

or, 36+ 10% commission of sale price = sales price

or 40

sales price per unit should be 40 for desired profit

Answer to question 2

Income statement

Sales ( 23000* R100) R2,300,000

- Cost of Goods Sold (51.6*23000) (R1,186,800) look below for absorption cost per unit

= Gross profit R1,113,200

operating expenses

marketing expenses R40 000 + (R5*23000) R155,000

+ Administrative expenses R50,000 + (R4*23000)   R142,000

= Total Expenses ( R 297,000)

net operating income R 816,200

absorption cost per unit

Variable manufacturing cost (R42* 25000) R 1,050,000

+ fixed manufacturing Overhead R 240,000

= Total product cost R 1,290,000

/ total unit produced 25000

= cost per unit    R 51.6