Question

Cottage Industries Ltd makes baskets. The fixed costs of operating the workshop for a month total $1,500. Each basket requires materials which cost $6. Each basket takes two hours to make and the business pays the basket- makers $9 an hour. The basketmakers are all on contracts that specify that if they do not work, for any reason, they are not paid. The baskets are sold to a wholesaler for $30 each. In addition, there is a fixed handling fee to all the wholesaler of $55. a) Break-even graph (i) What is the break-even number of orders? (4 marks) (ii) What is the corresponding break-even revenue? (1 mark) (iii) Draw a Break-even graph using EXCEL. Present appropriate calculations plus a copy of your EXCEL graph. Indicate on your graph the region corresponding to profits and the region corresponding to losses. (8 marks) EXCEL Instructions to produce a break-even graph: Create a column called Number of orders and in that column enter values from 0 to 400 in increments of 20. Then create two more columns, one for Total Cost and another for Total Revenue. Enter appropriate formulae in EXCEL to obtain the total cost and total revenue corresponding to each value in the Number of units column. Highlight the resulting three sets of numbers and go to Insert → Charts → Scatter to obtain a graph. Make sure that your graph has been labelled appropriately (i.e. title, axis labels, legend) and that your chart title includes your student ID. Refer to Topic 3 in the EXCEL Booklet for further instructions on entering formulae and graphing in EXCEL. Cottage Industries Ltd expects to sell 500 baskets a month. The business has the opportunity to rent a basket- making machine. Doing so would increase the total fixed costs of operating the workshop for a month to $6,000. Using the machine would reduce the labour time to one hour per basket. The basket-makers would still be paid $9 an hour. b) How much profit would the business make each month from selling baskets: (i) Assuming the bussuness doest not rent the basket-making machine? (2 marks) (ii) Assuming that it is rented? (2 marks) c) What is the break-even point if the machine is rented? (2 marks) d) What do you notice about the figures you calculated? (2 marks)

Answer 1

a) Break Even Graph Break Even No. Of Orders Calculation of Contribution Per Basket Amount (S) Amount ($) Particulars Selling Price Less: variable Cost Material Labour (2 9) Contribution 30 6 24 18 6 Contribution 100 Sales PV Ratio 6 100 30 PV Ratio PV Ratio 20% Fixed Cost Break even No. of Orders Contribution 1500+55 Break even No. of Orders 6.00 Break even No. of Orders Break even No. of Orders 259.1666667 260

Break Even Revenue Break Even No. of Orders Selling Price 260 30 Break Even Revenue Break Even Revenue Break Even Revenue 7800

Break Even Graph No. Of Orders ili) Total Revenue Total Cost Chart Title 0 0 25000 480 600 20 40 960 1200 20000 1440 1800 60 80 1920 2400 15000 100 2400 3000 10000 120 2880 3600 3360 140 4200 5000 4800 160 3840 4320 180 5400 1 2 3 4 s6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 200 4800 6000 220 5280 6600 No. of Orders Tatal Cast Total Revenue 7200 7800 240 5760 6240 6720 260 280 8400 9000 9600 300 7200 320 7680 8160 340 10200 8640 10800 360 380 9120 11400 9600 12000 400

Calculation of Profit b) il Business Does not rent the basket making machine Particulars Contribution per unit as calculated above No. of Baskets to be sold Total contribution Total contribution Total fixed cost Net Profit Amount 6 500 6 500 3000 1550 1450 ii) Basket is rented Calculation of revised contribution Amount ($Amount ($) Particulars Selling Price Less: variable Cost Material Labour (T9) Contribution 30 6 15 15 Calculation of Profit Particulars Contribution per unit as calculated above No. of Baskets to be sold Total contribution Total contribution Total fiwed cost Net Profit Amount 15 500 15 500 7500 6055 1445 ज

Break Even Point if Machine is rented C) Fixed Cost Break even no. of orders Contribution p.u 6055 Break even no. of orders 15 Break even no. of orders = 403.6666667 Break even no. of orders 404 Break Revenue Revenue Brek even no. of orders S.P Break Revenue Revenue 12120 d) From the figures calculated following points may be noted ij) If company sells 500 units, profit is higher when the machin is not rented ii) If the Machin rented the company is required to produce and sell 404 baskets to break even whereas without machin company is required to produce less no. of baskets to break even i.e. 260 iii) So, it appears that it is advisable for the company, not to use Basket making machine