Question

Question 1 [25 Marks]
The present market for golf balls is estimated at 80 000balls per month and market
research indicates that with a selling price of R3 per golf ball, a market penetration
of one third to a half can be achieved within 12 months. Your company has devised
a process which will produce golf balls with a fixed cost of R97 500 per month and a
variable cost of R1.50 per ball
Required
2.1 Calculate the contribution margin (CM) ratio
2.2 Calculate the breakeven point in units and in Rands
2.3 calculate the number of golf balls that must be sold in order to earn a target profit of R62 500
2.4 Calculate the margin of safety as a percentage (Round off to the nearest whole number)
2.5 further market research reveals that at a selling price of R2.80 the company could reach sales of 135 000 balls
a) Calculate the profit to be made if the company sells 135 000 golf balls per month
b) Calculate the new breakeven point in units
c) Should the company reduce the selling price? Give a reason for your answer

Answer 1

2.1)

Contribution margin ratio = Contribution margin/ Sales  

Contribution margin = Selling price - Variable cost

= 3 - 1.50

= 1.50

Ratio

= 1.50/3

=50%

2.2)

Breakeven sales in units = Fixed cost/ contribution margin per unit

= 97,500/1.50

= 65,000 units

Breakeven sales in Rands

= 65,000*3

= R195,000

2.3)

Number of balls to be sold

= (Profit to earn + Fixed cost)/Contribution margin per unit

= (62,500 + 97,500)/1.50

= 106,666.67 balls

2.4)

Margin of safety sales = Total sales - Breakeven sales

= 80,000 - 65,000

= 15,000 balls

As percentage

= 15,000/80,000

= 18.75%

2.5)

Profit made at 135,000 balls

Sales = 135,000*2.80 = 378,000

Variable cost = 135,000*1.50 = 202,500

Contribution margin = 175,500

Fixed cost = 97,500

Profit = 78,000

B)

New breakeven in units

= 97,500/(2.80 - 1.50)

= 75,000 units.

C)

As the profit has increased after decreasing the selling price therefore the company should reduce the selling price.

Also the earlier Profit was

= 80,000*1.5 - 97,500

= 22,500

New profit = 78,000

Therefore the company should decrease the price.

If you find the answer helpful please upvote.