Question

Two Left Feet Ltd produces and sells a single product, the Claud at Shs.500. The Unit manufacturing cost of Claud is Shs.200 and total fixed manufacturing costs equal to Shs.300,000. The company incurs selling and administration costs equal to 2% of sales revenue and fixed selling cost of Shs.100,000 per annum. Required: a) Determine the break-even sales in units and in shillings b) Determine the units that should be sold to earn a net income of Shs.200,000 c) If the company was in the 30% tax bracket, how many units will have to be produced to earn the Shs.200,000 d) Management is considering a policy which would increase fixed manufacturing costs by shs.200,000 but cut down on the variable manufacturing cost by 20% (i). What is the break-even point in units and in revenue under this policy? (ii). Assuming the 30% tax bracket, how many units will have to be produced to earn the target profit of Shs.200,000 under this new policy? e) At what level of sales level will management be indifferent between the two policies? f) Assuming that the maximum possible demand is 6,000 units, determine the range of sales which will be financially beneficial in each policy.

Answer 1

This is not an English Language question.  It is a business question.

a) The Break-even sales in units and in shillings are:

In units = Fixed costs/Contribution margin per unit

= Shs.400,000/Shs.290

= 1,379 units

In shillings = Shs.400,000/0.58

= Shs.689,655

b) Units to be sold to earn a net income of Shs.200,000:

= (Shs.400,000 +Shs.200,000)/Shs.290

= 2,069 units

c) Pretax net income = Shs.285,714 (Shs.200,000)/(1 - 0.30)

Units to be sold to earn a post-tax net income of Shs.200,000

= (Shs.400,000 +Shs.285,714)/Shs.290

= 2,365 units

d. i) Break-even point in units = Shs.600,000/Shs.330

= 1,818 units

Break-even point in shilling sales = Shs.600,000/0.66%

= Shs.909,091

d.ii) Tax rate of 30%

Units to be sold to earn the target profit of Shs.200,000 post-tax

Pre-tax profit = Shs.285,714 (Shs.200,000/(1 – 0.30)

= (Shs.600,000 + Shs.285,714)/Shs.330

= 2,684 units

e) Levels of sales that will make management indifferent are:

For Policy 1: Break-even point of 1,379 units

For Policy 2: Break-even point of 1,818 units.

At these levels, Two Left will not make any profit because total revenues will be equal to total costs.

f) The range of sales which will be financially beneficial in each policy with maximum demand = 6,000 units:

Policy 1: 1,380 to 6,000 units

Policy 2: 1,819 to 6,000 units.

a) Data and Calculations:

Selling price of Claud = Shs.500

Unit manufacturing cost 200

Selling and administration costs = 2% of sales revenue

= Shs.10 (Shs.500 * 2%) per unit

Total variable cost per unit = Shs.210 (Shs.200 + Shs.10)

Contribution margin/unit = Shs.290 (Shs.500 - Shs.210)

Contribution margin ratio = Shs.290/Shs.500 * 100 = 58%

Fixed manufacturing costs = Shs.300,000

Annual fixed selling costs = Shs.100,000

Total fixed costs = Shs.400,000 (Shs.300,000 + Shs.100,000)

With increase of Fixed costs by Shs.200,000 and reduced variable manufacturing cost by 20%

Total fixed costs = Shs.600,000 (Shs.400,000 + Shs.200,000)

Variable manufacturing cost = Shs.160 (Shs.200 * (1 - 20%)

Total variable costs per unit = Shs.170 (Shs.160 + Shs.10)

Contribution margin = Shs.330 (Shs.500 - Shs.170)

Contribution margin ratio = 66%

At break-even point, there is no profit, there is no loss.  Total revenue equals total costs (fixed and variable costs).  Below the break-even point, loss is incurred.  Above the break-even point, income is generated.

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