Question

Blue Shade wants to launch a new product called Shady Blue in the market. The sales manager needs to present the opportunity to management. He approaches you to assist him in calculating the required information.

He provides you with the following information.

Purchase price of the product R125,50/unit

Packaging cost R10,00/unit

Labour needed to wrap the product before it can be delivered. (The product must be wrapped and cannot be sold without the wrapping)

Wrap 2 products per hour. The employees will be paid R160 per day. The company work a 8 hour day. The employees will be utilised somewhere else f there are no products to be wrapped

A supervisor needs to be appointed at a monthly cost of R15,000.

Delivery cost to the wholesalers will be charged at R300 per 10 units delivered.

Additional space will be rented at R5,000 per month.

Additional general administration expenses will amount to R2,500 per month

Required:

Assist the sales manager in calculating the following:

1. The estimated sales price per unit. The company’s policy is a mark-up of 65% on variable cost. (5)

2. The contribution per unit. (1)

3. Break-even units to be sold to cover the additional costs. (1)

4. The number of units to be sold to achieve a profit before tax of 20% of the sales value. (2)

5. The number of units to be sold to achieve a profit after tax of 15% of the sales value. The tax rate is 28%.

Answer 1

Answer

Wrap Cost = Total cost for 8 hours / Total Units packed in 8 Hours

= $160 / 16 units

Wrap Cost = $10 per unit

Delivery cost = $300 / 10 units

Delivery cost = $30 per unit

	Variable Cost	Fixed Cost
Purchase price	125.50	-
Packing Cost	10.00	-
Wrap Cost	10.00	-
Supervisor salary	-	15,000
Delivery cost	30.00	-
Space rent	-	5,000
General Adm. Expense	-	2,500
Total	175.50	22,500

1.

Total no. of units produced or sold is not given, so I am assuming 100 units are produced.

Total Sales = Total Variable cost for 100 Units + Total Fixed Cost + 65% Mark-up on variable cost

= (175.5 * 100 Units) + $22,500 + [65% * (175.5 * 100 Units)]

Total Sales = $51,457.5

Sales price per unit = Total sales / 100 Units

= $51,457.5 / 100 Units

Sales price per unit = $514.575 per unit

2.

Contribution Per unit = Sales price per unit – Variable cost per unit

= $514.575 – 175.5

Contribution Per unit = $339.075

3.

Breakeven point (In Units) = Total Fixed Cost / Contribution per unit

= $22,500 / 339.075

= 66.35 Units

Breakeven point (In Units) = 66 Units

There may be some difference as the units are in points and we cannot sell units in points.

4.

Profit = 20% of sales

Let no. of units to be sold = x

Sales price = $514.575 per unit

Sales = $514.575 per unit * x Units

Profit = $102.915x (20% of $514.575x)

Profit = (Sales – Variable cost) – Fixed Cost

Profit = Contribution Margin – Fixed Cost

102.915x = 339.075x – 22,500

236.16x = 22,500

X = 95.27 Units

= 95 Units

We need to sell 95 units to earn 20% profit on sales.

There may be some difference as the units are in points and we cannot sell units in points.

5.

Profit = 15% of sales

Let no. of units to be sold = x

Sales price = $514.575 per unit

Sales = $514.575 per unit * x Units

Profit = $77.186x (15% of $514.575x)

Profit = (Sales – Variable cost) – Fixed Cost

Profit = Contribution Margin – Fixed Cost – [Tax * (Contribution Margin – Fixed Cost)]

77.186x = 339.075x – 22,500 – [28% * (339.075x – 22,500)]

77.186x = 339.075x – 22,500 – 94.941x + 6,300

22,500 – 6,300 = 339.075x - 94.941x - 77.186x

16,200 = 166.948x

X = 97 Units

We need to sell 97 units to earn 15% profit on sales.

There may be some difference as the units are in points and we cannot sell units in points.

Dear Student, if u have any doubt, plz feel free to reach me.