Question

Neal Electronics Ltd produces two types of memory sticks: a Student Memory Stick and a Professor Memory Stick. The Student Memory Stick sells for $35, and the Professor Memory Stick sells for $100. The company’s income statement for the month of September is given below:

	Student Memory Stick		Professor Memory Stick
Sales for the September month	20,000 units		5,000 units
	Per unit ($)	Total $	Per unit ($)	Total $
Sales	$35	$700,000	$100	$500,000
Less Costs
Direct material cost	$5	100,000	$15	75,000
Direct labour cost	$4	80,000	$10	50,000
Variable overhead	$1	20,000	$5	25,000
Fixed Costs	$6	120,000	$11	55,000
Total Costs	$16	$320,000	$41	205,000
Net Profit/(Loss)		$380,000		$295,000

Required:

1. Calculate the breakeven for each of the following situations:

1. If the company made only the Student Memory Stick, what would the breakeven point in units and dollars be for the month of September?
2. If the company made only the Professor Memory Stick, what would the breakeven point in units and dollars be for the month of September?
3. Determine the combined breakeven point in units if the company makes a combination of Student and Professor Memory sticks in the ratio 4:1. Show clearly the breakeven units and dollars (using the ratio given) for the Student Memory Stick and Professor Memory Stick under this combined breakeven point.

Calculate the margin of safety percentage for the combined production of Student and Professor Memory sticks for the month of September. Explain what this percentage means for the company

For the month of October the company is considering the use of a new sophisticated method to produce the memory sticks. If the new method is adopted for both types of memory sticks, fixed costs for both products per month will increase by 20% but direct materials, direct labour and variable overhead costs will all decrease by 10%. The October month expected sales and unit selling price will be the same as the month of September. Would you recommend that the company adopt the new method? Determine the expected profit to be made for the October month and use this calculation to explain your answer.

	Student Memory Stick		Professor Memory Stick
Sales for the October month	20,000 units		5,000 units
	Per unit ($)	Total $	Per unit ($)	Total $
Sales	$35	$700,000	$100	500,000
Less Costs
Direct material cost
Direct labour cost
Variable overhead
Fixed Costs
Total Costs
Net Profit/(Loss)

Answer 1

1-
selling price		35
variable cost per unit	5+4+1	10
contribution margin per unit		25
contribution margin per unit	25/35	0.7143
Break even point in units= total fixed cost/contribution margin per unit	(120000+55000)/.25	700000
Break even point in units= total fixed cost/contribution margin ratio	(120000+55000)/.7143	244995
2-
selling price		100
variable cost per unit	(15+10+5)	30
contribution margin per unit		70
contribution margin per unit	70/100	0.7000
Break even point in units= total fixed cost/contribution margin per unit	(120000+55000)/70	2500
Break even point in units= total fixed cost/contribution margin ratio	(120000+55000)/.70	250000
3-
weighted average contribution margin	(4/5*25)+(1/5*70)	34
Combined break even in units	(120000+55000)/34	5147
Break even units-Student memory stick	5147*4/5	4118
Break even units-Professor memory stick	5147*1/5	1029
Break even sales in dollars -Student memory stick	4118*35	144130
Break even sales in dollars-Professor memory stick	1029*100	102900
total break even sales	144130+102900	247030
4-Margin of safety %	(actual sales-break even sales)/break even sales	(1200000-247030)/247030	386%
This % means than company is selling 386% more than the break even level of sales
5-
		student memory stick		Professor memory stick	total
sales	20000*35	700000	5000*100	500000	1200000
variable cost
Direct material	20000*5*(1-.1)	90000	5000*15*(1-.1)	67500	157500
direct labor	20000*4*(1-.1)	72000	5000*10*(1-.1)	45000	117000
direct overheads	20000*1*(1-.1)	18000	5000*5*(1-.1)	22500	40500
fixed cost	20000*6*(1+.2)	144000	5000*11*(1+.2)	66000	210000
total cost		324000		201000	525000
net profit		376000		299000	675000
net profit in the month of september	380000+295000				675000
He is no change in the proposed proposal as the profitability is same in both the situations