Gnaviyani Atoll Education Centre, Fuvamulah / Class Assignments

Gnaviyani Atoll Education Centre, Fuvamulah Class Assignments Question 1 An ex-colleague of yours has recently left the company, leaving behind an incomplete management report. Your manager has asked you to complete the report, details of which are below.

Required: (a) Complete the report by calculating the figures i to x inclusive. (20 marks) (b) State the assumptions on which break-even calculations are based. (5 marks)

Question 2 Your organisation Ambleside Limited produces one product that is sold for £65 per unit. Each of these units has variable costs as follows: 5 hours labour at £4.60 per hour Royalties at £2.80 per unit 6 square metres of material per unit at £2.60 per square metre The fixed costs of Ambleside Limited are £30,000. You are required to calculate the following: a) The contribution per unit towards the fixed costs of the organisation (5 marks) (b) The number of units that would have to be produced to earn the organisation a profit of £12,000 (6 marks) (c) The profit earned if the organisation sells 17,600 units (6 marks) (d) The profit earned if the selling price is reduced to £60 and the demand rises to 18,900 units sold. (6 marks)

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Gnaviyani Atoll Education Centre, Fuvamulah / Class Assignments Question 3 The Alpha Company has produced the following budget. The company produces and sells one product only.

You know that material costs are totally variable but labour and overhead are semivariable. The fixed element of the above labour cost is £1,600,000 and the fixed element of the overhead cost is £5,600,000. The unit selling price is £80. In order to develop sales the company plans next year to reduce the selling price of each unit by 5% - this should increase the volume sold by 25%. For next year, fixed costs in total are expected to increase by £200,000. Required (a) Present a statement showing contribution in total and per unit. (12 marks) (b) Calculate the present break-even point. (3 marks) (c) Calculate the present margin of safety. (3 marks) (d) Calculate the break-even point if the changes outlined above on unit selling price and quantity are introduced next year. (3 marks) (e) Advise on whether or not the price change should be implemented. (4 marks) Question 4 Coniston Ltd produces one product that sells for £120 per unit. Each of these units has variable costs as follows: – 7 hours labour at £6.20 per hour – 15 metres of material at £2.60 per metre – Royalties at £6 per unit The fixed costs of Coniston Ltd are £80,000 per annum. Required: Calculate the following: (a) The contribution per unit towards the fixed costs of Coniston Ltd. (5 marks) (b) The number of units that would have to be sold to achieve break-even. (5 marks) (c) The profit earned if Coniston Ltd sells 3,800 units. (6 marks) (d) The profit earned if the selling price is reduced by 5% and the demand rises to 4,100 units. (7 marks)

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Gnaviyani Atoll Education Centre, Fuvamulah / Class Assignments

Question 5 Bully Ltd budgets its costs and revenue for product A for the next financial period as follows:

For the period concerned the budgeted fixed overhead is $100,000 and the budgeted sales are 12,000 units. Required: (a) Calculate the budgeted profit for the period. (4 marks) (b) Calculate and explain the significance of (i) The Break Even Point in units and dollars (3 marks) (ii) The Margin of Safety in units and dollars. (3 marks) (c) Show by means of a statement, the effect on the budgeted profit of each of the following independent courses of action, and calculate the Break Even Point for each of the three courses of action. (i) Reduce the selling price to $35 per unit, this will increase sales by 2,000 units with an increase in fixed overhead of $10,000. (ii) Increase the selling price to $45 per unit, this will reduce sales by 4,000 units and increase direct material costs by $2 per unit for all units, with fixed costs being unchanged. (iii) Reduce the selling price to $30 per unit, this will increase sales by 5,000 units, increase fixed overhead by $12,000 and decrease direct material costs by $3 per unit for all units. (15 marks)

Question 6 An organisation, Kendal Ltd, produces a garden bench that sells for £200. The costs associated with producing the benches are as follows: Direct materials £65 per bench Direct labour £83 per bench The fixed costs of Kendal Ltd are £25,000 and current demand is expected to be 700 benches, per annum. Required: (a) (i) What is the expected profit (based on estimated demand)? (ii) What is the number of garden benches that needs to be sold to earn a profit of £5,000? (6 marks) (b) The organisation is considering two alternative proposals: 1. reducing the sales price by 15% which is expected to increase demand by 10% per annum

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Gnaviyani Atoll Education Centre, Fuvamulah / Class Assignments 2. increasing the sales price by 5% which is expected to reduce demand by 15% per annum What would be the anticipated profit or loss under the two alternative proposals? (12 marks)

Question 7 Cassy Ltd makes a single product which it sells for £70 per unit. The company currently manufactures 90,000 units of product which represents 40% of its manufacturing capacity. At this level of output the total costs are £6,800,000 of which £2,750,000 are fixed. Required: (a) Calculate the break-even point in units. (3 marks) (b) Express the break-even point as a percentage of total capacity. (2 marks) (c) Calculate the profit that would be earned if the company could operate at maximum capacity. (3 marks) (d) A new customer offers to buy 50,000 units of the product at a selling price of £50 per unit. Should the company accept this order? Give reasons for your answer. (6 marks) (e) The financial director sees this order in (d) as the chance for the company to break even for the year. Calculate the selling price for the 50,000 units that would achieve this. (6 marks) (f) Cost-profit-volume analysis is subject to certain assumptions. Briefly list what these assumptions may be. (5 marks)

Question 8 Tigger Ltd has budgeted its costs for the forthcoming period as follows, based on production and sales of 600 units.

Material Labour Variable overhead Fixed overhead Selling costs

$ 18,000 15,000 12,000 14,000 9,000

The selling costs at the budgeted level of production are 50% variable, and each unit of production sells for $180 each. After examining the figures, various suggestions are made.

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Gnaviyani Atoll Education Centre, Fuvamulah / Class Assignments

1 The production director suggests that the company could manufacture 800 units in the period but labour costs would increase for all units by 40%. 2 The sales director believes that in order to sell 800 units, the selling price would need to be reduced to $170 per unit, and extra sales staff would need to be employed at a fixed cost of $3,000 in total for the period. 3 He also suggests that if the selling price were increased to $200, only 450 would be sold, without the need for the extra sales staff but with a loss of material discounts which would increase the material costs by 10%. Required: (a) Prepare profit calculations for sales at 450, 600, and 800 units, in accordance with the above suggestions. (14 marks) (b) Calculate the break-even point in units for each alternative. (7 marks) (c) Advise management as to the best course of action, highlighting any reservations that you may have concerning the directors’ suggestions. (4 marks) Question 9 Consider a firm that manufactures bathroom suites with a projected selling price of £1,200. The firm has fixed costs of £44,000 per month and variable costs per bathroom suite are £700. (a) Find the firm’s break-even level of monthly output. (5 marks) (b) If the firm plans to sell 100 suites per month, calculate its expected monthly profit. (5 marks) (c) What quantity should the firm produce and sell to make a profit of £5,000 per month? (5 marks) (d) If the firm is making a loss of £6,000 per month, what increase in production would be required to break even? (5 marks) (e) If fixed costs rise to £63,000 per month and price rises to £1,400 per bathroom suite, find the new break-even level of monthly output. (5 marks)

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Prepared By: Emmanuel George

Gnaviyani Atoll Education Centre, Fuvamulah / Class Assignments

Answers (a) Product A (i) Break even point = Sales – Margin of Safety = $300,000 – 175,000 = $125,000 (ii) If C/S Ratio = 40%, then Variable Costs to Sales = 60% Variable costs = 60% × $300,000 = $180,000 (iii) Contribution = Sales – Variable Costs = $300,000 – 180,000 = $120,000 or 40% × $300,000 = $120,000 (iv) Break even point = Fixed Costs/CS Ratio Fixed costs = Break even point × CS Ratio = $125,000 × 40% = $50,000 (v) Profit = Contribution – Fixed Costs = $120,000 – 50,000 = $70,000 or, Margin of Safety × CS Ratio = 40% × $175,000 = $70,000 Product B (vi) Margin of Safety = Profit/CSRatio = $120,000/50% = $240,000 (vii) Sales = Margin of Safety + Break even point = $240,000 + 160,000 = $400,000 (viii) Variable costs = 50% Sales = $400,000 × 50% = $200,000 (ix) Contribution = $400,000 – 200,000 = $200,000 or 50% × $400,000 = $200,000 (x) Fixed costs = Contribution – Profit = $200,000 – 120,000 = $80,000 (b) That fixed costs remain the same at all levels of production That there is a constant sales mix That variable cost per unit remains constant That selling price per unit remains constant Production methods and efficiency remain unchanged That all costs are either fixed or variable, or can be separated into fixed and variable elements Question 2 (a) Contribution per unit £ (per unit) Sales 65 Less: variable costs – labour (5 at £4.60) (23) – Royalties (2.80) – material (6 at £2.60) (15.60) –––––– Contribution 23.60

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Gnaviyani Atoll Education Centre, Fuvamulah / Class Assignments –––––– (b) Fixed costs are £30,000 Plus required profit £12,000 –––––––– £42,000 Therefore £42,000/23.60 (contribution) = 1,780 units to make a profit of £12,000 (c) Sales on 17,600 = 17,600 * 23.60 = total contribution of £415,360 less the fixed costs of £30,000 = total profit of £385,360 (d) Contribution reduces (because of reduced selling price) to £18.60 Therefore 18,900 * £18.60 = total contribution of £351,540 less the fixed costs of £30,000 = total profit of £321,540

Question 3

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Gnaviyani Atoll Education Centre, Fuvamulah / Class Assignments

Question 5

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Gnaviyani Atoll Education Centre, Fuvamulah / Class Assignments

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Gnaviyani Atoll Education Centre, Fuvamulah / Class Assignments Question 6 (a) (i) 700*52 = £36,400 – £25,000 = £11,400 (ii) Fixed costs £25,000 Profit needed £5,000 Contribution is £200 – £148 ie £52 Number needed is £30,000/52 ie 577 benches (b) (i) Contribution is £170 – £148 ie £22 per bench £22*770 = £16,940 – £25,000 = (£8,060 loss) (ii) contribution is £210 – £148 = £62 £62*595 = £36,890 – £25,000 = £11,890

Question 7

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Gnaviyani Atoll Education Centre, Fuvamulah / Class Assignments

Question 8

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Gnaviyani Atoll Education Centre, Fuvamulah / Class Assignments

Question 9 (a) At the break-even level, Total revenue = Total cost. 1200Q = 44000 + 700Q 500Q = 44000 Q = 88 So the break-even level of output is 88 suites per month. (b) Profit = R – C = 500Q – 44000 When Q = 100, Profit = 50000 – 44000 = 6000 So when 100 suites are sold per month, the expected monthly profit is £6,000. (c) Profit = R – C = 500Q – 44000 So profit is £5,000 when: 500Q – 44000 = 5000 500Q = 49000 Q = 98

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Gnaviyani Atoll Education Centre, Fuvamulah / Class Assignments So the required quantity is 98 suites per month. (d) When 500Q – 44000 = –6000, Q = 76 Since the break-even level is 88, an additional 12 suites per month are required to break even. (e) Now 1400Q = 700Q + 63000 Q = 90 So the new break-even level is 90 suites per month.

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