Question

Mani Small Lt. Is an exclusive distributor for a new product. The product sells for $160 per unit and has a contribution to sales ratio of 40%. The company fixed expenses are $300 000 per annum. You are the cost accountant of the company and the following are required:

a) The variable expense per unit
b) The contribution per unit
c) The company’s break- even point in units and sales dollar.
d) Draw a graph clearly showing (c) above along with the areas for profit & loss and the margin of safety in units and dollars.
e) What sales level in units and sales dollars is required to earn before tax profit of $120 000.           ( 3 marks)
f) What would the new break- even point in units & dollars be if cost cutting measures to reduce variable expenses by 20% are implemented?

Answer 1

Answer to a)

Contribution per unit = Sales price per unit - variable cost per unit

So variable cost = 160$-(160*40%) i.e. 96$ per unit.

b) - Contribution per unit = 160*40%= 64$ per unit

c)Break even point (in units) = Fixed expense divided by contribution per unit

300000$/64$ =4687.5 units or in $ =4687.5*160$=750000$

d) Margin of saftey - Total Sales - break even sales

e) = Required profit = 120000$ Fixed cosr= 300000$

therefore total contribution required = 120000$+300000$ = 420000$

Contribution per unit = 64$

Sales required to achieve the profit = 420000$/64$ =6562.5 units and 6562.5*160= 1050000 $ sales.

f) Current variable cost = 96$ per unit

revised variable cost = 96$*80%= 76.8 per unit

revised contribution per unit = 160-76.8 = 83.2 per unit

New break even (Same formula stated above) = 300000/83.2 = 3605.77 units i.e 576923$ in sales.