Question

You are the chief financial analyst of Hercules Manufacturing Limited. The company manufactures bowls and has been planning to aggressively expand its sales into the Middle Eastern markets. You have been tasked to analyse its reports using CVP and provide explanations to the Director, Tierra Muller. 

The operating statement relating to the month ended September 30, 2019 of Hercules Manufacturing Limited is as follows: 

 

 $’000 $’000 Sales (22,000 units)  3,300 Direct materials 726  Direct labour 374  Production overheads 798  Total  1,898 Gross profit  1,402 Selling overheads  1,042 Net profit  360 

The variable production overheads were $9 per unit while the variable selling overheads were $11 per unit. 

Required: 

a) Calculate the contribution margin per unit. (1.5 marks) 

 

b) Calculate the breakeven sales in units, and provide one explanation on the usefulness of breakeven sales information. (2.5 marks) 

c) Calculate the margin of safety in dollars and provide one explanation on the usefulness of margin of safety information. (2.5 marks)  

d) The company has a capacity of 30,000 units per year. Management is not happy with the financial performance for the last year, and one course of action for the coming year were proposed in the recent management meeting: • The sales manager believed that unit volume would increase by 30% with the incurrence of $200,000 on advertising. 

Prepare a CVP income statement for the alternative (showing columns for totals only). Would you recommend this alternative and why? (3 marks) 

e) The company has a target net income of $750,000. Assume additional advertising costs will be incurred, what is the required sales in dollars for the company to meet its target? (1.5 marks)