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