Question

Question 1 (15 marks) Monsoon Company Ltd that specialises in the manufacturing of heavy mgation equipment has been experiencing a decline in proſts recently The board of directors have challenged management to come up with some cost cutting measures that would require bold decision-making on management's part in order to improve the bottom line The income statement of the company as at 30 September 2018 reflects the following Sales (5,000 units * R15) R75 000 Less vanable expenses 37 500 Cost of goods sold Direct matenals R15 000 Direct labour 10 000 Variable factory overhead 10 000 Selling and administrative 2 500 Contribution margin R37 500 Less fixed expenses 25 000 Factory overhead R10 000 Selling and administrative 15 000 Net income (loss) R1 500 In an attempt to improve the company's profit performance, management is considenng a number of alternative actions 1 Required Determine the effect of each of the following on monthly profit Each situation is to be evaluated independently of all the others Purchasing automated assembly equipment This action should reduce direct labour costs by 40 percent It also will increase vanable overhead costs by 10 percent and fixed factory overhead by R2 500 (5) 2 Reducing the unit selling price by R2 per unit This should increase the monthly sales by 5 000 units Fixed factory overhead will increase by R1 500 (5) Increase fixed selling and administrative expenses by R1 000 for advertising costs The number of units sold will increase to 8 000 units (5) 3

Answer 1

Given Income Statement of the company as at 30th September 2018

Existing
Particulars		Amount
Sales (5000*15)		75000
Less - Variable Cost
COGS
Direct Material	15000
Direct Labour	10000
Variable Factory Overhead	10000
Selling and Administrative	2500	37500
Contribution Margin		37500
Less - Fixed Expenses
Factory Overhead	10000
Selling and Administrative	15000	25000
Net Income		12500

Existing Net Income is 12500, in question Net Income is misprinted.

Three different situtation is calculated below

Situation 1
Particulars		Amount
Sales (5000*15)		75000
Less - Variable Cost
COGS
Direct Material	15000
Direct Labour [10,000 - (10,000*40%)]	6000
Variable Factory Overhead [10,000 + (10,000+10%)]	11000
Selling and Administrative	2500	34500
Contribution Margin		40500
Less - Fixed Expenses
Factory Overhead	12500
Selling and Administrative	15000	27500
Net Income		13000

Situation 2
Particulars		Amount
Sales (10000*13)		130000
Less - Variable Cost
COGS
Direct Material 3 Per unit	30000
Direct Labour 2 Per Unit	20000
Variable Factory Overhead 2 Per unit	20000
Selling and Administrative 0.5 Per unit	5000	75000
Contribution Margin		55000
Less - Fixed Expenses
Factory Overhead (10,000+1,500)	11500
Selling and Administrative	15000	26500
Net Income		28500
Situation 3
Particulars		Amount
Sales (13000*15)		195000
Less - Variable Cost
COGS
Direct Material 3 Per Unit	39000
Direct Labour 2 Per Unit	26000
Variable Factory Overhead 2 Per Unit	26000
Selling and Administrative 0.5 Per Unit	6500	97500
Contribution Margin		97500
Less - Fixed Expenses
Factory Overhead	10000
Selling and Administrative (15,000 + 1,000)	16000	26000
Net Income		71500

As we can see in situation 3, Net Income of the company is highest.

Company Should increase 1000 Rs expenditure in the advestisment sector, as it would result in 8000 more units to be sold.

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