Question

Jokowi Bond Sdn Bhd (JBSB) produces a type of box which is sold for RM15 per unit. The normal annual production and sales for the boxes are 20,000 units.

The following data consist of costs incurred during the year ended 2018:

	RM
Direct material	80,000
Direct Labour	50,000
Variable selling expenses	30,000
Administrative expenses (60% variable)	60,000
Fixed manufacturing overhead	20,000

The management accountant of the company is proposing the following alternatives to increase sales for the year 2019 and to reduce the idle capacity:

• Reducing the selling price to RM12 per unit which would lead to an estimated increase in the sales volume by 15%.
• An increase in sales would result in an increase of direct labour cost per unit by 10%.
• Fixed manufacturing overhead   is also expected to increase to RM25,000 due to an aggressive advertising campaign planned to boost sales.

Required:

1. 1. Calculate the total variable cost per unit and total fixed expenses for the year 2018.
2. 2. Calculate break even unit and sales for 2018.             
   3. Calculate margin of safety in units and value for 2018.  
   4. Advise JBSB’s management on whether they should implement the proposal outlined above for the year 2019. (Show profit comparison).  

Answer 1

a
Calculation of total variable costs	Amount RM	Cost per unit
Number of units sold	20,000.00
Direct materials (80,000/20,000)	80,000.00	4.00
Direct Labor (50,000/20,000)	50,000.00	2.50
Variable selling expenses (30,000/20000)	30,000.00	1.50
Variable Administrative expenses (60,000*0.6/20000)	36,000.00	1.80
Total variable costs	196,000.00	9.80
Calculation of total fixed costs	Amount RM	Note
Fixed manufacturing overhead	20,000.00
Fixed Administrative expenses (60000*0.4)	24,000.00
Total fixed costs	44,000.00
b	Amount RM
Selling price per unit	15.00
Less: Variable cost per unit	9.80
Contribution per unit	5.20
Total fixed costs	44,000.00
Breakeven point (units) = 44000/5.2	8,461.54
X           Sell price per unit	15.00
Breakeven point (sales)	126,923.08
c	Amount RM
Number of units sold	20,000.00
Less: Breakeven units	8,461.54
Margin of safety in units	11,538.46
	Amount RM
Number of units sold	20,000.00
X       Sell price per unit	15.00
Total sales	300,000.00
Less: Breakeven sales	126,923.08
Margin of safety in value	173,076.92
d
Revised situation
Units sold in 2018	20,000.00
X Increase in 2019 by 15%	3,000.00
Units sold in 2019	23,000.00
Units sold in 2018	20,000.00
Direct Labor	50,000.00
Direct Labor cost per unit	2.50
Increase in 2019 by 10%	0.25
Direct Labor cost per unit in 2019	2.75
Comparative Income Statement	2018	2019
Number of units sold	20,000.00	23,000.00
Sell price	15.00	12.00
Less: Variable costs per unit
Direct materials	4.00	4.00
Direct Labor	2.50	2.75
Variable selling expenses	1.50	1.50
Variable Administrative expenses	1.80	1.80
Total Variable costs per unit	9.80	10.05
Contribution per unit	5.20	1.95
Total Contribution	104,000.00	44,850.00
Less: Fixed costs
Fixed manufacturing overhead	20,000.00	25,000.00
Fixed Administrative expenses	24,000.00	24,000.00
Total fixed costs	44,000.00	49,000.00
Net Profit	60,000.00	-4,150.00
Decrease in Net Profit by		64,150.00
If the changes were done in 2019 then its net profit will decrease by $ 64,150. So the proposal should not be accepted.