Question

Question 2                                                                                                             [12 marks]

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%.                                                                                                             (3)

Answer 1

Formula sheet

A	B	C	D	E	F	G	H	I	J
2
3		Variable costs will be as follows:
4
5		Variable cost per units are as follows:
6		Purchase price of the product	125
7		Packaging cost per unit	10
8		Labor cost per unit	=(160/8)/2	=(160/8)/2
9		Delivery cost per unit	=300/10
10		Total variable cost per unit	=SUM(D6:D9)
11
12		Fixed Cost for the month can be calculated as follows:
13		Supervisor cost	15000
14		Rent for space	5000
15		General Administration cost	2500
16		Total Fixed cost	=SUM(D13:D15)
17
18		1)
19
20		Variable cost per unit	=D10
21		Markup	0.65
22
23		Price of the product	=D20*(1+D21)	=D20*(1+D21)
24
25		Hence price of the product is	=D23
26
27		2)
28
29		Contribution margin can be calculated as follows:
30		Contribution margin Per unit	= Selling Price per unit- Variable cost per unit
31		Using the following data:
32		Selling Price Per unit	=D25
33		Total variable cost per unit	=D10
34
35		Contribution margin Per unit	= Selling Price per unit- Variable cost per unit
36			=D32-D33	=D32-D33
37
38		Hence Contribution margin per unit is	=D36
39
40		3)
41
42		Breakeven units are number of units that company needs to produce to cover its fixed and variable costs.
43
44
45
46
47		Using the folling data:
48		Contribution margin per unit	=D38
49		Fixed Cost	=D16
50
51		Breakeven Units	=Fixed Costs / Contribution margin per unit
52			=D49/D48
53
54		Hence breakeven-sales in units is	=ROUND(D52,0)
55
56		4)
57
58		Assuming number of units to be sold is	X
59		Price per unit	=D25
60		Revenue	288.75X
61		Profit before Tax	0.2	of sales Value
62		Profit before Tax	=288.75X*20%
63			=57.75X
64
65		Required sales in units for a target profit is given by following formula:
66
67
68
69
70		Using the folling data:
71		Contribution margin per unit	=D38
72		Fixed Cost	=D49
73		Target Profit	=D63
74
75		Required Units to be sold can be calculation by solving the following equation
76		X = (22,500+57.75X)/113.75
77
78		Above equation can be solved to find X as follows:
79
80		X=	=D72/(D71-57.75)	=D72/(D71-57.75)
81
82		Hence Number of units to be produced is	=D80
83