Question

Question four

M Ltd’s budgeted profit for its next financial year, when it expects to be operating at 75% of its capacity, is as follows:

                                                                                                             K’000          K’000

Sales 9, 000 units at K32 per unit                                                                         288

Less:

        Direct material                                                                               54

        Direct wages                                                                                   72

         Production overhead

                              Fixed                                                                           42

                              Variable                                                                      18

                                                                                                                                          186

Gross profit                                                                                                                      102

Less: Non-production cost

          Fixed                                                                                              36

          Varying with sales volume                                                         27

                                                                                                                                           63

                                                                                                                                            39

It is estimated that:

1. If the selling price per unit were reduced to K28, the increased demand would utilise 90% of the company’s capacity without any additional advertising expenditure;

2. To attract sufficient demand to utilize full capacity would require a 15% reduction in the current selling price and a K5,000 special advertising campaign.

Required

1. Calculate the breakeven point in units based on the original budget

                                                                                                                                       

2. Calculate the profits and breakeven points that would result from each of the 2 alternatives and compare them with the original budget

                                                                                                                                    

3. Make a recommendation based on the information in (a) and (b)

                                                                                                                                      

                                                                                                                                         

Answer 1

Solution:

A.

B.

It shows that there is a decrease in net income in both the options compared to the original data, also the BEP is units is more in compariosn to the original budget

C.

Its better for the company to stick on to the original budget as the profit is more and even the BEP is at a lower level in comparion to the other options.

Hope this helps! In case of any clarifications, kindly use the comment box below