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In: Accounting

Question 6 The Sock company buys hiking socks for GHS6 per pair and sells them GHS10....

Question 6
The Sock company buys hiking socks for GHS6 per pair and sells them GHS10. Management budgets monthly fixed costs of GHS12,000 for sales volume between 0 and 12,000 pairs.

Required
Consider the following questions separately by using the foregoing information each time.
i. Calculate the breakeven point in units.

ii. The Sock Company reduces its sales price from GHS10 per pair to GHS8 per pair. Calculate the new breakeven point in units.

iii. The Sock Company finds a new supplier for the socks. Variable costs will decrease by GHS1 per pair. Calculate the breakeven point in units.

iv. The Sock Company plans to advertise in hiking magazines. The advertising campaign will increase total fixed costs by GHS2,000 per month. Calculate the new breakeven point in units.

v. In addition to selling hiking socks, the Sock Company would like to start selling sports socks. The Sock Company expects to sell one pair of hiking socks for every three pairs of sports socks. The Sock Company will buy the sports socks for GHS4 per pair and sell them for GHS8 per pair. Total fixed costs will stay at GHS12,000 per month. Calculate the breakeven point in units for both hiking socks and sports socks.

Expert Solution

All working forms part of the answer
Break Even point in Units = Fixed Cost / Contribution margin per unit, where

---contribution margin per unit = Sale price per unit – variable cost per unit.

Part (i)

Contribution margin = GHS 10 - GHS 6 = GHS 4
Fixed Cost = GHS 12,000

Break Eve point in units = GHS 12,000 / GHS 4 = 3,000 units.

Part (ii)

Contribution margin = GHS 8 - GHS 6 = GHS 2
Fixed Cost = GHS 12,000

Break Eve point in units = GHS 12,000 / GHS 2 = 6,000 units.

Part (iii)

Contribution margin = GHS 10 - GHS 5 = GHS 5
Fixed Cost = GHS 12,000

Break Eve point in units = GHS 12,000 / GHS 5 = 2,400 units.

Part (iv)

Contribution margin = GHS 10 - GHS 6 = GHS 4
Fixed Cost = GHS 12,000 + GHS 2,000 = GHS 14,000

Break Eve point in units = GHS 14,000 / GHS 4 = 3,500 units.

Part (v)

Sales Mix = 1 hiking socks for 3 sport socks = 1:3
Hiking socks = 25% (1/4)
Sport Socks = 75% (3/4)

Contribution margin for Sport socks = GHS 8 - GHS 4 = GHS 4

Working		Hoking Socks	Sport Socks
A	Contribution per unit	GHS 4.00	GHS 4.00
B	Sales Mix	25%	75%
C=A x B	Weighted Average Contribution margin	GHS 1.00	GHS 3.00

Total Weighted Average contribution margin per unit = GHS 1 + GHS 3 = GHS 4

Fixed Cost = GHS 12,000

Total Break Even point in Units = GHS 12,000 / GHS 4 = 3,000 units

Working		Hoking Socks	Sport Socks
A	Total Break Even point in Units	3,000	3,000
B	Sales Mix	25%	75%
C=A x B	Individual Break Even in Units	750	2,250

Break Even point in units:

Hiking socks = 750 units
Sport Socks = 2,250 units

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