DBA Ltd manufactures and sells a single product, the wooden chair. The company’s financial information reveals the following information:
Summarised Statement of Profit or Loss – 12 months to 31st December 2020
GHC’000
GHC’000
Sales (12,000 units)
2,880
Direct materials
840
Direct wages
960
Factory overheads
120
Administration expenses
376
Selling expenses
280
2,576
Profit/(Loss)
304
Additional Information:
1. Material and labour costs are variable
2. Factory overheads are fixed apart from a GHC4 per unit variable cost.
3. Administration expenses are all fixed.
4. Selling expenses are fixed apart from sales commission of GHC10 per unit.
Required:
a. Based on the figures to 31st December 2020, calculate the number of units the company needed to sell in order to: (i) break-even.
(ii) achieve a profit of GHC456,000.
b. Calculate the margin of safety in units for 2020 based on (a) (i)
c. Evaluate and briefly comment on the profitability & viability of each of the following
proposals:
(i) Proposal 1 – Reduce the selling price by 15%, this is estimated to increase the sales volume by 40%.
(ii) Proposal 2 – The production manager and sales manager have met and agree that an increase in direct wages and the marketing costs can increase production and sales by 25%. It is suggested that marketing costs should increase by GHC25,000 and direct wages should increase by 10%.
d. Discuss other ways the company can try and improve on the 2020 results.
e. Cost-Volume-Profit Analysis is based on assumption about the behaviour of revenue, costs and volume. Outline these assumptions.
