Question

marry poppins a friend of yours has recently set up a small business making curtains, she supplied you with the following figures and has asked your advice on a number of issues

a. how much profit she will make at the proposed productionlevel and selling price

b. how many pairs of curtains she needs to sell to break even at the this price

Cost per month

Matrials 4100

labour 5000

Production overheads 2000

selling and distribution 1000

administration overheads 500

above costs are based on producing 1200 pairs of curtains per month at selling price of R15 each

80% of labour is fixed, as the 75% of production overheads,60% of selling and distribution and 100% of administration overheads. All other costs vary directly with output.

Answer 1

Segregating Fixed and variable cost

	Variable Expense	Fixed expense	Total
Materials	4100 x 100% =4100	0	4100
Labour	1000	5000 x 80%= 4000	5000
Production Overhead	500	2000 x 75% = 1500	2000
Selling and distribution	400	1000 x 60% =600	1000
Administration Overhead	0	500 x100%=500	500
Total	6000	6600	12600

a) Profit on producing 1200 units

Sales	1200 x15 = 18000
Less: Total cost	12600
Profit	5400

b) Break even sales

BEP is Fixed cost / Contribution per unit

Contribution = Selling price - variable cost per unit

Seling price	15
Less : variable cost per unit (60000/1200)	5
Contribution per unit	10

Break even sales = 6600/10 = 660 units