Question

Question 2 [12 marks]
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/unit
Packaging cost	R10,00/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

Labour cost per unit = 160/16 = R10 per unit

Total variable cost = 125.50+10+10+30 = 175.50 RS per unit

Total fixed cost = 15000+2500 = 17500 RS per month

Sale price = 175.50+65%of 175.50 = RS 289.50 per unit

Contribution per unit = 289.50-175.50 = RS 114 per unit

Break even point = 17500/114 = 154 units per month

No. Of units for 20% profit before tax = 17500/((289.50*.80)-175.50) = 312 units per month

No. Of units for 15% profit after tax = 17500/(((289.50*.85)-175.50)*(1-0.28)) = 345 units per unit