Question

Question 4

Yuan SDN BHD (YSB) produces and sells strings of colourful indoor lights for holiday display to retailers for RM 8.42 per strings. The variables costs per strings are as follows:


RM

Direct materials
1.87

Direct labor
1.70

Variables factory overhead
0.57

Variables selling expenses
0.42

Fixed factory overhead cost totals RM245,650 per year. Fixed administrative cost totals RM 301,505. YSB expects to sell 225,000 strings of light next year.

Required :

a) calculated break even point in units and RM.
b) calculate margin of safety in units and RM.
c) how many units must be sold to earn profit of RM 500,000?
d) suppose YSB actually experiences a price decrease next year while all other costs and the number of units sold remain the same. Would this increase or decrease risk for the company? ( hint : consider what would happen to the number of break even units and to the margin of safety).

Answer 1

RM 8.42 Answer(a) Calculation of Contributions margin per unit Selling Price per unit Less : Variable Cost per unit Direct Material Direct labor Variable factory overhead Variable Selling Expenses Total Variable cost per unit Contribution margin per unit RM 1.87 1.70 0.57 0.42 4.56 RM 3.86 Calculation of Fixed Cost Fixed Factory overhead + Fixed Administrative cost RM 245,650 + RM 301,505 RM 547,155 Contribution margin ratio Sales RM 3.86 RM 8.42 45.84% Contribution margin -100 *100 Break even point(in units) Break even point(in units) Fixed Cost Contribution margin per unit RM 547,155 RM 3.86 141,750 units Break even point(in $) Fixed Cost Contribution margin ratio RM 547,155 45.84% RM 1,193,535 Answer(b) Margin of safety (in units) Current Sales in units - Breakeven Sales in units 225,000 - 141,750 83,250 units Margin of safety (in RM) Current Sales = Current Sales in RM - Breakeven Sales in RM 225,000 * RM 8.42 RM 1,894,500 Margin of safety (in RM) RM 1,894,500 - RM 1,193,535 RM 700,965

Answer(c) Sales required to earn target net Income of RM 500,000 Fixed Cost + Target Income Contribution margin per unit RM 547,155 + RM 500,000 RM 3.86 RM 1,047,155 RM 3.86 271,284 units Answer(d) If price decreases and all the cost remain same the Contribution margin decreases due to which Breakeven point increases and Margin of safety decreases it will increase the risk for the company Suppose Price per unit decreases to RM 8 Revised Contribution margin = RM 8 - RM 4.56 RM 3.44 Break even point(in units) RM 547,155 RM 3.44 159,057 units Breakeven units increases by 17,307 units (159,057 units - 141,750 units) Margin of safety (in units) Current Sales in units - Breakeven Sales in units 225,000 - 159,057 65,943 units Margin of safety units decreases by 17,307 units (83,250 units - 65,943 units) Hence it is proved risk increases.