Question

Question 2                                                                
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 per unit
Packaging cost	R10,00 per 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

Solution 1:

Labor cost needed to wrap per unit = (R160 / 8) / 2 = R10 per unit

Variable cost per unit = purchase price per unit + Packaging cost per unit + Labor cost per unit + Delivery cost per unit = R125.50 + R10.00 +R10 + (R300/10) = R175.50

Mark up = Variable cost *65% = R175.50*65% = R114.075

Estimated sale price per unit = Variable cost + Mark up = R175.50+ R114.075 = R289.575

Solution 2:

Contribution per unit = Sale price per unit – Variable cost per unit =

Solution 3:

Break even units per month = Fixed costs / contribution margin per unit

Fixed cost = 15000 +5000+ 2500 = R22,500

Break even units = R22500 / R114.075 = 197.23866

Solution 4:

Let us assume the number of units to be sold be “X” units.

Profit before tax = Contribution – Fixed cost

X*289.575*20% = X*114.075 – 22500

X*57.915 = X*114.075 -22500

22500= 114.075 X – 57.915 X

22500 = 56.16 X

X = 22500 / 56.16

X = 400.64103

Therefore units to be sold = 400.64103

Solution 5:

Let us assume the number of units to be sold be “X” units.

Profit After tax = Contribution – Fixed cost – Tax

X*289.575*15% = X*114.075 – 22500 – (X*114.075 -22500)*28%

43.43625 X = 114.075 X - 22500 – 31.941 X – 6300

28800 = 114.075 X - 31.941 X - 43.43625 X

28800 = 38.69775 X

X = 28800/38.69775 = 744.22932

Hence number of units to be sold = 744.22932