Question

QUESTION 4 Green Grocer Ltd is a manufacturing entity in the city of Clutchmore. The company manufactures and sells a single product by the name of Product P. In the financial year ended 30 June 2020, 200,000 units of Product P were sold for $10 each. The cost of sales was $6 per unit, and the total amount was considered as variable cost. In addition, other expenses incurred by the company were as follows: Marketing expenses Administration expenses Variable Cost component $0.80 per unit $1.20 per unit Fixed Cost component $164,000 $176,000 Required: a) Calculate Product P's contribution margin per unit. (1 mark) b) Calculate the breakeven number of units and sales amount. (2 marks) c) Calculate the profit or loss earned in the financial year ended 30 June 2020. (2 marks) d) Green Grocer Ltd wants to double the amount of profit made in the next financial year (i.e. year ending 30 June 2021). In order to achieve this: • The company will increase the selling price of Product P by $0.50 per unit. The production processes will be changed. This will cause an increase in cost of sales of $1.30 per unit. Combined marketing and administration expenses, however, will decrease by $0.40 per unit for the variable cost component, and the fixed cost component will decrease by $60,000. Based on the proposed pricing and cost structure, calculate the number of units of Product P needed to achieve the targeted profit in the next financial year. (4 marks) e) Discuss the concept of operating leverage, and whether it is advisable for Green Grocer Ltd to implement the proposed cost structure in producing Product P. (Maximum 120 words) (3 marks) f) If Green Grocer Ltd abandons the proposed plan to change the pricing and cost structure of Product P as outlined in part (d), and the company still wants to double its profit in the next financial year (i.e. year ending 30 June 2021), then a second product by the name of Product Q may be introduced. Product Q will sell for $12 per unit and has a variable cost of $8.50 per unit. In addition, total fixed cost will increase by $100,000 due to the company having to purchase additional equipment to manufacture Product Q. The expected sales is 150,000 units of Product P and 100,000 units of Product Q. Calculate: (i) the weighted average contribution margin (WACM), and (ii) the number of units of Product P and Product Q required to earn the desired profit in the next financial year. (4 marks)

Answer 1

130 H 15 Question 2 17 E Break Even in Units = Total Fixed Costs / Contribution Margin per unit Total Fixed Costs = 340,000 Contribution Margin per Unit=2 Break Even Units = 340,000 / 2 Break Even Units = 170,000 Units 22 23 24 Contribution Margin Ratio = Contribution / Sales* 100 Contribution = 400,000 Sales = 20,00,000 Contribution Margin Ratio = 4,00,000 / 20,00,000 Contribution Margin Ratio = 20% 25 26 27 28 29 30 Break Even in (Dollar Value) - Total Fixed Costs / Contribution Margin Ratio Total Fixed Costs = 340,000 Contribution Margin Ratio = 20% Break Even in (Dollar Value) = 340,000 * 100 / 20 Break Even in (Dollar Value) = $ 17,00,000 31 32 Sheet 569 Sheet 570 Sheet14 Sheet 565 (2) Sheet 565 (3) Sheet18 Sheet 311 (2) + Ready

Master - Excel Sign in File Home Insert Page Layout Formulas Data Review View Help Tell me what you want to do Share Calibri 11 VA === Cut LE Copy Format Painter ab Wrap Text General AutoSum - 47 0 Paste BIU- OA- EE Fill- Merge & Center % Insert Delete Format Conditional Format as Cell Formatting Table Styles Styles Clear Clipboard Font Sort & Find & Filter - Select Editing Alignment Number Cells A28 ... X ✓ A B J 13 14 с D E F G H Cost of Sales = $ 6 + Increment of 1.30 = $ 7.30 Combined Variable Marketing and Administrative Expenses = $2 - Reduction of $ 0.4 per Unit = $ 1.6 Combined Fixed Marketing and Administrative Expenses = 340,000 - Reduction of $ 60,000 = $ 280,000 Target Profit = 120,000 (2 Times of Previous Year Profit = 2 * 60,000) 15 16 17 18 19 Contribution Margin to earn Profit of 120,000 = Fixed Costs + Target Profit Contribution Margin to earn Profit of 120,000 = 280,000 + 120,000 Contribution Margin to earn Profit of 120,000 = $ 400,000 20 21 22 23 24 Units required to earn Contribution Margin of 400,000 = 400,000 / Contribution Margin per Unit Contribution Margin per Unit = 1.60 Units required to earn Contribution Margin of 400,000 = 400,000 / 1.60 Break Even Units = 250,000 Units 25 26 27 28 29 Sheet 569 Sheet18 Sheet 311 (2) Sheet 570 Sheet14 Sheet 565 (2) Sheet 50 (3) 14096 @ 1 Ready