Question

QUESTION ONE
RECOVERY, a family-owned business, manufactures its single product and sells it at K16 per unit.
The business, which currently has a monthly production capacity of 19 000 units, has orders for, and plans to sell 18 000 units in the next month.
The following information is available:
i. Monthly costs for 16 000 units are estimated at K136 000
ii. Monthly costs for 18 000 units are estimated at K148 000
iii. The company only manufactures that which has been ordered and keeps no inventory.

REQUIRED:
(A) Calculate the Variable cost per unit (2 Marks)
(B) Calculate, showing your workings, the estimated Fixed Cost (2 Marks)
(C) For the planned sales of 18000 units, draw a graphical presentation of the following cost lines in Kwacha against the number of Units. (all lines must be in the same graphical presentation) (6 marks)
i. Fixed Cost
ii. Variable Cost
iii. Total Cost
(D) Calculate the Contribution sales ratio (2 Marks)
(E) Calculate the Break-even revenue (3 Marks)
(F) Calculate the Net profit for the planned sales of 18 000 units (5 Marks)

Answer 1

A. The variable cost per unit is K6.

B. The fixed cost is K40,000 (K136,000 - K96,000)

C. i) The fixed cost of K40,000 will have 2,500 units (K40,000/K16).

ii) Variable cost of K108,000 will have 6,750 units (K108,000/K16).

iii) Total Cost of K148,000 will have 9,250 units (K148,000/K16).

D. The contribution sales ratio = 0.625 (K10/K16)

E. Break-even revenue = Total variable costs + Total fixed costs

= K64,000 (K40,000/0.625)

F. The net profit for the planned sales of 18,000 units is K140,000 (K288,000 - K108,000 - K40,000).

What is break-even analysis?

Break-even analysis is the determination of the units or quantities at which a good or service will be produced so that the company can cover its costs without any loss.

Thus, break-even analysis evaluates the unit at which the company will not incur any loss or sustain a profit.  At the break-even point, the revenue equals the costs.

Data and Calculations:

Selling price per unit = K16

Monthly Production Capacity = 19,000 units

Planned sales = 18,000 units

                                  Production Capacities    Differences

Planned production      16,000        18,000            2,000

Monthly costs           K136,000    K148,000        K12,000

Total variable costs   K96,000   K108,000

Fixed costs                 K40,000    K40,000 (K148,000 - K108,000)

Using the high-low method of cost determination, the Variable cost per unit = K6 (K12,000/2,000).

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