Question

REQUIRED

Use the information provided below to answer each of the following questions independently:

1.1 Calculate the break-even value using the marginal income ratio.

1.2 The sales manager proposes a R2 per unit reduction in selling price with the

expectation that this would increase sales by 2 000 units. Is this a good idea?

Motivate your answer.

1.3 Determine the selling price per unit if a net profit of R486 000 is desired.

INFORMATION

The following forecasts for January 2021 were provided by Waltons Manufacturers:

Sales (36 000 units)	R1 080 000
Direct materials cost per unit	R8
Direct labour cost per unit	R5
Variable manufacturing overhead costs per unit	R2
Fixed manufacturing overheads	R150 000
Fixed marketing and administrative costs	R120 000
Sales commission	10% of sales

Answer 1

1.1:

Working notes:

Calculation of Profit volume ratio (PV ratio):

Particulars	Amount
Sales	1080000
Less:Variable cost	648000
Contribution	432000
Less:Fixed cost (150000+120000)	270000
Profit	162000

Pv ratio=Contribution/sales

=432000/1080000

=40%

Therefore,

Break even value= Fixed cost/Pv ratio

=270000/40%

=675000.

1.2

Particulars	Amount
Sales (38000 units) - 38000 x 28	1064000
Less:Variable cost (38000 x 18)	684000
Contribution	380000
Less:Fixed cost	270000
Profit	110000

PV ratio=380000/1064000

=35.71%

The new proposal of the sales manager is not a good idea.

Pv ratio for proposal is less than existing system.

If PV Ratio is more that is company will achive more profit and recover fixed cost fast.

so already earning profit is 162000 but proposal case 110000 less than previous one.

1.3

Particulars	Amount
Profit	486000
Add:Fixed cost	270000
Contribution	756000
Add:Variable cost (36000 x 18)	648000
Sales	1404000
Sales in units	36000 units
Sales per unit=sales/sales in units	1404000/36000
Sale per unit	39 per unit

Working Note-1
Total Variable cost
Direct material cost per unit	8
Direct labour cost per unit	5
Variable Manufaturing overhead per unit	2
Sales commission per unit	3	W.No-2
Total variable cost per unit	18
Sales in units	36000 units
Total variable cost                                        =	R18*36000
=	R648000
Working Note-2
Sales Commission
Sales	R1080000
Sales Commission                                         =	10 % of sales
=	R1080000*10%
=	R108000
Sales in units	36000 units
Sales Commission per unit                        =	R108000/36000
=	3 per unit
Working Note-3
Fixed Cost
Fixed Manufacturing Overhead	R150000
Fixed Marketing and administrative Overhead	R120000
Total Fixed Cost	R270000