Question

FunKids Sdn Bhd produces a type of toy which is sold for RM120 per unit. The normal annual production and sales for the toys are 2,800 units, although the company has the capacity to produce up to 3,000 units.

The following data consist of costs incurred during the year ended 2019:

RM
Material (100% variable) 70,000
Labour (70% variable) 80,000
Selling expenses (40% variable) 58,000
Fixed administrative expenses 50,000

The management accountant of the company is proposing the following alternatives to increase sales for the year 2020 and to reduce the idle capacity:

1. Reducing the selling price to RM110 per unit which would lead to an estimated increase in the sales volume by 30%.
2. An increase in sales would result in an increase of variable labour cost per unit by 15%.
3. Fixed selling expenses is also expected to increase to RM32,500 due to an aggressive advertising and marketing campaign planned to boost sales.

Required:

a) Determine the following costs in year 2019:
i. Total variable costs per unit.                                                                       
ii. Total fixed costs.                                                                                       

b) Calculate the following in year 2019:
i. Break-even points in units and in value.                                                      
ii. Margin of safety in units and in value.                                                         
iii. The expected sales value if the company targets for a profit of RM100,000.


c) Advice the management of FunKids Sdn Bhd if the company should implement the proposed alternative for year 2020. (Show profit comparison).                            
(Total: 25 Marks)


Question 2 (Answer)
total variable cost
Material cost =100% variable
Labor cost
selling expenses
fixed administrative expenses
total variable cost per unit

Break even point in units
Break even point in sales
contribution margin ratio

Margin of safety

expected sales value for 100000 profit

Proposed plan
selling price
selling units
variable cost
fixed cost
Income statement
sales
variable cost

Answer 1

Solution

a)

i) Total Variable cost per unit in 2019

Production and sales volume is 2800

Meterial cost 100% variable, ie : 70000

Labour cost 70% variable = 56000 (80000*70%)

Selling expense 40% variable =23200 (58000*40%)

Total variable cost = 70000+56000+23200

= 149200

Variable cost per unit = 149200/2800

= 53.286

ii) Total Fixed cost

Fixed labour cost = 24000 (80000*30%)

Fixed selling expense =34800 (58000*60%)

Fixed administrative expense is $50000

Total fixed cost = 24000+34800+50000

   = 108800

b)

i) Break even point

Break even point in unit = Fixed cost / Contribution per unit

Fixed cost is 108800

Contribution per unit= Selling price - variable cost

ie, =120 - 53.286

= 66.714

So, break even point = 108800/66.714

  = 1631 units

Break even point in value = 195720 (1631*120)

ii) Margin of safety

Total sale - 2800

Break even sale -1630

Margin of safety in units = Total sales unit - break even sales unit

Margin of safety = 1169 units (2800-1631)

Margin of safety in value = 140280 (1169*120)

Contribution sales ratio = (120/66.714) * 100

= 55.6%

iii) Expected sales to get the profit of 100,000

To get 100,000 profit Sales = (Fixed cost + 100,000)/contribution per unit

= (108800 + 100,000)/66.714

= 3130 units or

375600 in sales value (3130*120)

c) Profit for 2019

Sales price = 336000 (120*2800)

Variable cost = 149200

Contribution =186800 (336000 - 149200)

Fixed cost = 108800

Profit for 2019 = 78000 (186800-108800)

​​​​​​Profit for 2020

Sales volume = 3640 (30% increase in sales.ie, 2800*130%)

Sales price = 400400 (3640*110)

Meterial cost = 91000 (3640*25)*

Variable labour cost = 72800 (20*3640)**

* meterial cost per unit is 25 (70000/2800)

**variable labour cost per unit is 20 ([80000*70%]/2800)

Variable selling expense =23200

Therefore,

Contribution = 213400

Fixed cost = 141300 (108800+32500)

Profit for 2020 = 72100

While implementing this approach the profit for the funkids sdn bhd is decreasing comparing to 2019 result.By looking this result its not good approach for the company.But in future this may results in increasing sales and fixed cost will remain same and inrease the profit