Question

Ba-Gode sales Nsima with Mbuzi at the Lusaka number one most famous eating place “Matebeto” were most people go to enjoy Nsima with a wide range of all native Zambian relish. Like most small business Ba-Gode, does not have a management accounting especially planning and budgeting. Competition is very fierce and you Palibe Kanthu you are a regular customer for eating nsima with mbuzi and you have been engaged Ba-Gode on a number of issues that he may consider in order to gain completive advantage. You have spoken to him on the concept of cost volume profit analysis and variance analysis not forgetting the need for his entity to keep production overheads low.

Ba-Gode has told you that his average selling price per plate of nsima is ZMW50 and 45% of the selling price is makes up direct costs. Every plate of nsima is comes with a 300mls glass of well fermented Zambian munkoyo which customers get for free as part African desert. This munkoyo is outsourced from Bana dyululu and she sells ZMW5 per every 300mls glass she suppliers Ba-Gode sold. He also pays a rental ZMW2,430.00 per month for the cooking utensils. The monthly rental cost for the place is ZMW 4,500 but he also pays to the Lusaka City Council a levy of ZMW1,200 per annum. He also pays Nyuma Ngoma a very beautiful cashier lady an annual salary of ZMW42,000.00. Ba-Gode has a monthly average daily demand of 45 plates sold. He opens at 09:00 am and closes at 17:00 pm (8 hours)

For the purpose of this question, today is 1st September 2020 and consider an average business month of 30 days for all the 12 months.

Required

1. How many plates he needs to sale for him to recover all the period and unavoidable costs and advise Ba-Gode the date and estimated time on which he will neither make a loss nor a profit.   
2. Advise Ba-Gode the monthly margin of safety both in form of number of plates and interpret both results.                                                                                                  
3. Calculate the current month contribution ratio per plate and monthly profit.

4. Ba-Gode is planning to increase the monthly absolute contribution per plate by 10% in the next financial year, monthly fixed costs will go up by 8%. He also plans to begin monitor at the fixed costs closely and you have advised him that he may either Activity Based Costing (ABC) or Absorption Costing.
   1. Advise Ba-Gode what he must do to the cost elements in order to archive the 10% increase in the contribution per plate.

2. How may plates of Nsima (Ugali) should he sell in order for him to archive 20% increase in the annual profit for the next financial year under the new cost structure.
3. Using facts in the case in question advise Ba-Gode which production overheads method will be more suitable for his business

(6 marks

Answer 1

		Per Unit	Units	Monthly
	Selling Price	50	45 Daily 1350 monthy	67500
Variable cost	Selling Expenses	22.5
	300 Ml Mnkoyo	5
	Total VC	27.5	1350	37125
Contribution	SP- TVC	22.5	1350	30375
Fixed Cost	Rent utensils			2430
	Rent palace			4500
	Levy(1200/12)			100
	Salary (42000/12)			3500
	Total FC			10530
	Profit			19845

a) No of Plates required to cover up all period and unavoidable fixed cost.

10530/22.5 = 468 Plates

45 Plates sold daily so Hourly sold = 45/8= 5.625 Plate per hour

So 468 plates will complete in 468/5.625= 83.2 hours , which is 10 days 3.2 hours and If today is 1st Sept, the required plates will complete on 11th Sept Between 12pm to 1 pm.

b) Margin of Safety in Units= Actual Sale - Break even sale= 1350-468=882 Plates

Margin safty in % = Margin safefty units x Selling price / total sales

882x45/67500 = 58.8%

Both these tell how business margnins are safe i.e higher the better. 882 plates or 58.8% tell that after recovering all fixed cost our business additional sell 882 plates to generate direct contribution. It also tells our business will not incurr loss if this 882 plates not sold or drop in sales by 58.8%.

c) Contribution ratio= Contribution / sales

30375/67500= 45%

Monthly Profit = 19845 as per above Table.

D)

i) To increase 10% contribution i.e. 22.5 x 10%= 2.25 per unit. you need to lower down the variable cost by 2.25 per unit Either from Variable selling expenses or 300ML Monkoyo or from both combinly.

ii) No. of plates to achieve 20% Increase in annual profit with revised cost structure.

= 2333( Approx) Plates per year

iii) ABC analysis is useful for the organization whose productio is scattered in different department and we need proper allocation base for aborpotion of costing. but in the given there is restaurent and no many activities are there to apply ABC so Absorpotion costing would be better. Absorb cost with hours worked or no. of plates sold.

Please comment if further clarification needed.