Question

Francois French manufactures cheese, which he normally sells at €20/kg, on which sales commission of 5% is paid. Plant capacity is 7,500 kg/month. Income tax is levied at 30%. Fixed costs Costs per kg. Plant depreciation € 8,000 Direct materials € 4 Other plant costs 15,000 Direct labor 2 Corporate salaries 10,000 Var. factory O/H 3 Advertising 3,000 Francois French wants to increase after-tax profits to €35,000. Assuming sufficient demand, which strategy achieves this goal? Sell 7,100 kgs at the present price Pay the dairy €1/kg less and sell 7,500 kgs Sell 8,000 kgs at €20.79/kg Sell 7,500 kgs at the present price and eliminate the sales commission None of the above

Answer 1

(a)

Sell 7,100 kgs at the present price

Sales (7,100 x 20) (i)	142,000
Direct material (7,100 x 4)	28,400
Direct labor (7,100 x 2)	14,200
Variable factory overheads (7,100 x 3)	21,300
Sales commission (142,000 x 5%)	7,100
Plant depreciation	8,000
Other plant costs	15,000
Corporate salaries	10,000
Advertising	3,000
Total cost (ii)	107,000
Profit before tax (i) - (ii)	35,000
Tax	- 10,500
Profit after tax	24,500

(b)

Pay the dairy €1/kg less and sell 7,500 kgs

Sales (7,500 x 20) (i)	150,000
Direct material (7,500 x 3)	22,500
Direct labor (7,500 x 2)	15,000
Variable factory overheads (7,500 x 3)	22,500
Sales commission (150,000 x 5%)	7,500
Plant depreciation	8,000
Other plant costs	15,000
Corporate salaries	10,000
Advertising	3,000
Total cost (ii)	103,500
Profit before tax (i) - (ii)	46,500
Tax	- 13,950
Profit after tax	32,550

(c)

Sell 8,000 kgs at €20.79/kg

Sales (8,000 x 20.79) (i)	166,320
Direct material (8,000 x 4)	32,000
Direct labor (8,000 x 2)	16,000
Variable factory overheads (8,000 x 3)	24,000
Sales commission (166,320 x 5%)	8,316
Plant depreciation	8,000
Other plant costs	15,000
Corporate salaries	10,000
Advertising	3,000
Total cost (ii)	116,316
Profit before tax (i) - (ii)	50,004
Tax	- 15,004
Profit after tax	35,000

Correct option is (c)

Answer 2

correct answer is none of the above