Question

QUESTION 4 Cemerlang Company manufactures and sells a product by the name PREMIUM. These products are sold at RM20 per unit. The company's sales amounted to RM8 million (normal capacity) for the year ended December 31, 2010. The following is the cost involved to produce these products Direct material Direct labor Variable overhead Manufacturing cost: fixed RM 4.00 per unit RM 3.00 per unit RM 2.60 per unit RM 240 000 RM 60 000 variable Selling and distribution expenses fixed RM 180 000 variable RM 100 000 Fixed administrative expenses RM 180 000 Required a) By using the appropriate formula, calculate i. The break-even point in units and RM (10 marks) ii. The profit or loss of business for the year ended December 31, 2010 (5 marks) b) Based on the original information, solve each situation separately: i. If the advertising spending increased by RM200 000, calculate the new break-even point. (4 marks) ii. If the company management intended to reduce the variable cost of RM0.40 per unit, calculate the total profit to be earned. (3 marks)

Answer 1

Information given:

Sales per unit = RM 20.00

Total sales value = RM 8 Million, i.e., 8,000,000

Sales in unit 8,000,000/20 = 400,000 units

Variable cost per unit

Variable cost per unit:

Direct material                                                          = RM 4.00

Direct Labour                                                            = RM 3.00

Variable overhead                                                      = RM 2.60

Variable manufacturing cost        = 60,000/4,00,000   = RM 0.15

Variable Selling & Distribution exp =1,00,000/4,00,000 = RM 0.25

Total Variable cost per unit                                          = RM 10.00

Contribution per unit = Sales per unit- Variable cost per unit = (RM 20-RM 10) = RM 10

Total Fixed cost:

Manufacturing cost                  = RM 240,000

Selling & Distribution Exp       = RM 180,000

Administrative Exp                  = RM 180,000

Total Fixed cost                       = RM 600,000

1. By using the appropriate formula calculate:

i). The Break Even Point in units and RM:   

BEP in RM = Fixed cost / PV ratio

PV ratio = Contribution/ Sales *100 = 10/20*100 = 50%

           BEP in RM = 600,000/ 50*100 = RM 1,200,000

           BEP in unit = BEP sales / Sales per unit

                               = RM 1,200,000/RM 20 = 60,000 units

ii). The profit or loss of the business for the year ended December 31, 2010:

   Profit = Sales value *PV ratio – Fixed cost

            = 8,000,000* 50/100 – (600,000)

            = 4,000,000 -600,000

            = 3,400,000

2. Based on the original information , solve each situation seperately:

1. If the advertising spending increased by RM 200,000, calculate the new BEP:

So, total fixed cost = 600,000+200,000 = 800,000

BEP = Fixed cost / PV ratio

New Fixed cost = 800,000

              PV ratio = Contribution/ Sales *100 = 10/20*100 = 50%

BEP in RM = 800,000/ 50*100 = RM 1,600,000

2. If the company management intended to reduce the variable cost of RM 0.40 per unit, calculate the total profit to be earned:

New variable cost per unit = RM 10.00 - 0.40 = RM 9.60

Contribution per unit = Sales per unit – Variable cost per unit) RM 20- RM 9.60 = RM 10.40

Profit = Sales value *PV ratio – Fixed cost

Sales value = RM 8,000,000

              PV ratio = Contribution/ Sales *100 = 10.40/20*100 = 52%

Profit = Sales value *PV ratio – Fixed cost

= 8,000,000 *52/100= RM 4,160,000