Question

QUESTION 4 (15 MARKS) LGE Enterprise is a manufacturer of pinewood dining tables. A set is sold at RM700. The variable cost is RM300 per set and the fixed cost of the business is RM100,000 per year. Required: Calculate the contribution margin for a set of dining table. (ii) Determine the number of set of dining table that need to be sold to achieve break-even point. (2 marks) (iii) Determine the number of set of dining table that need to be sold, to achieve the target profit of RM80,000 per year. iv) Determine the number of set of dining table that need to be sold, to achieve break-even point, if the selling price is reduced by RM50. (2 marks) v) Determine the number of set of dining table that need to be sold to achieve break-even point, if the price of pinewood is increased by RM10 for a set of dining table but the selling price is maintained at RM700. (3 marks) vi) Determine the number of set of dining table that need to be sold to achieve break-even point, if the fixed cost is increased by RM5,000. Assume the selling price per set is maintained at RM700 and variable cost is maintained at RM300 per set. (3 marks)

Answer 1

Answer to first 4 parts of the question: i) Contribution margin per set of dining table = Selling price per set of dining table - Variable cost per set of dining table Selling price per set of dining table RM700 Less: Variable cost per set of dining table RM300 RM400 [RM700 - RM300] Contribution margin per set of dining table Number of set of dining table to be sold at break-even point = Fixed cost cost of business / Contribution margin per set of dining table ii) Fixed cost cost of business RM100,000 RM400 [As calculated Part-(i)] 250 [RM100000 / RM400] Contribution margin per set of dining table Number of set of dining table to be sold at break-even point iii) Number of set of dining table to be sold to reach target profit = (Fixed cost cost of business + Target profit) / Contribution margin per set of dining table Fixed cost cost of business RM100,000 Target profit RM80,000 Contribution margin per set of dining table RM400 450 [(RM100000 + RM80000) / RM400] Number of set of dining table to be sold to reach target profit

Number of set of dining table to be sold at break-even point = Fixed cost cost of business / Revised contribution margin per set of dining table iv) RM100,000 [No Change] RM350 [Ref: NOTE] Fixed cost cost of business Revised contribution margin per set of dining table 285.71 [RM100000 / RM350] Number of set of dining table to be sold at break-even point 286 [If rounded off to zero decimal place] or = NOTE: When selling price is reduced by RM50 per set of dining table, contribution margin will also decrease by RM50. As the current contribution margin per set of dining table is RM400 (Ref: Part-(i)), the revised contribution margin per set of dining table = RM400 - RM50 = RM350.