Question

The House of Manji produces three products named; Cookies; Biscuits and Weetabix whose financial data is provided below:

	Cookies	Biscuits	Weetabix	Total
Sales	1,150,000	1,540,000	1,350,000	4,040,000
Cost of goods sold:
Direct materials	423,000	507,000	378,000	1,308,000
Direct labour	392,000	413,000	353,000	1,158,000
Variable selling expenses	195,000	130,000	147,000	472,000
Fixed overhead expenses				705,280
Net income				396,720

The income statement above has been prepared for 5,000 units, 10,000 units and 10,000 units of Cookies, Biscuits and Weetabix respectively.

The management is evaluating a proposal to change the sales mix to 10,000 units, 5,000 units and 10,000 units of Cookies, Biscuits and Weetabix respectively.

Required:

1. Calculate the break-even sales under the current and the proposed plan      
2. Calculate the sales that would yield a profit of ksh 573,040 under both plans

Answer 1

Below is the for break even sales and target sales for the required profit under current and proposed plan :

Current production level
Particulars	Reference	Cookies	Biscuits	Weetabix	Total
Sales	A	11,50,000	15,40,000	13,50,000	40,40,000
Cost of goods sold:
Direct materials	B	4,23,000	5,07,000	3,78,000	13,08,000
Direct labour	C	3,92,000	4,13,000	3,53,000	11,58,000
Variable selling expenses	D	1,95,000	1,30,000	1,47,000	4,72,000
Total Variable expenses	E (B+C+D)	10,10,000	10,50,000	8,78,000	29,38,000
Contribution (Sales - Variable Cost)	F (A-E)	1,40,000	4,90,000	4,72,000	11,02,000
Contribution % of Sales	G (F divided by A)				27%
Fixed overhead expenses	H				7,05,280
Break-even Sales	I (H divided by G)				25,85,600
Quantity		5000	10000	10000
Target profit	J				5,73,040
Fixed expenses + Target profit	K (J+H)				12,78,320
Target Sales for the profit level (Fixed cost + Profit) / Contribution %	L (K divided by G)				46,86,400

Proposed level of production
Particulars	Reference	Cookies	Biscuits	Weetabix	Total
Sales price / unit (as per table 1 below)	A	230	154	135
Quantity	B	10,000	5,000	10,000
Sales	C (A*B)	23,00,000	7,70,000	13,50,000	44,20,000
Cost of goods sold:
Variable cost per unit (as per table 1 below)	D	202	105	87.8
Total Variable expenses	E (D*A)	20,20,000	5,25,000	8,78,000	34,23,000
Contribution (Sales - Variable Cost)	F (C-E)	2,80,000	2,45,000	4,72,000	9,97,000
Contribution % of Sales	G (F divided by C)				23%
Fixed overhead expenses	H				7,05,280
Break-even Sales	I (H divided by G)				31,26,718
Target profit	J				5,73,040
Fixed expenses + Target profit	K (J+H)				12,78,320
Target Sales for the profit level (Fixed cost + Profit) / Contribution %	L (K divided by G)				56,67,176

Table 1 - Computation of per unit Sales and variable cost
Particulars	Cookies	Biscuits	Weetabix
Sales	11,50,000	15,40,000	13,50,000
Total Variable expenses	1010000	1050000	878000
Quantity	5000	10000	10000
Variable cost / unit (variable cost / quantity)	202	105	87.8
Sales price / unit (Sales / quantity)	230	154	135