Question

Part 1

Carnival Handy Bag Limited (“Handy Bag”) manufactures and sells a single product. The following information is available for three years ending 30 September

			Price per	Unit volume
			unit	000s
Sales			$
Actual 2011			130	50
Forecast 2012			129	52
Forecast 2013			128.5	53
Costs per unit			Actual	Forecast
Produced			2011	2012	2013
			$	$	$
Direct materials			50	55	55
Direct labour			30	31.5	33
Variable production overhead			10	11	12
Direct expenses			5	5	6
Variable sales overhead			15	16	16
Other costs for the year			$	$	$
			000	000	000
Fixed production overhead			50	55	55
Other fixed overhead			200	220	220
Additional information:
When the management of Handy Bag prepared its direct labour forecast unit cost for 2012 and 2013, direct wages were increased only by the forecast rate of inflation
The trade union representatives of the production workers wished to press for a greater wage increase. They suggested that:
Direct wages be increased at twice the rate of inflation. The effect of this would be to increase direct labour costs per unit as follows:
	2012	2013
	$	$
Direct labour	33.0	35.0
Unit selling prices be increased in order to cover the increased labour costs.
It is to be assumed that all expense and revenue relationships will be unchanged except where indicated
Required:
A schedule for 2011, 2012, 2013 for Handy Bag Ltd showing:
the break-even points;
the net profit for each year.
Base your calculations on the original labour costs.
A graph showing a break-even point for 2012.
Advise Handy Bag management as to their response to the trade union’s claim for higher wages. Include relevant financial analysis
Explain the limitation of break-even analysis in the context of the question.

Part 2

Handy Bag also produces 1,000 bags for export per month for a fixed cost of $300,000 and variable cost of $500 per unit. Its current demand is 600 units which it sells at $1,000 per unit. It is approached by Man Purse Limited for an order of 200 units at $700 per unit.

Should Handy Bag accept the order and why?          

Answer 1

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AS FOR GIVEN DATA...

A:
	2011	2012	2013
Sold volume	50000	52000	53000
SP	130	129	128.5
Less: VC:
DM	50	55	55
DL	30	33	35
VPO	10	11	12
DE	5	5	6
VSO	15	16	16
total VC	110	120	124
Contribution	20	9	4.5
Total contribution	1000000	468000	238500
Total Fixed cost	250000	275000	275000
NI	750000	193000	-36500
BEP (fc/cont p.u.)	12500	30555.56	61111.11
C. The trade union's claim should not claim for higher wages as the selling price
do not increase with increase in wages leading to loss.
D. The limitation fo BE analysis is that
1) BE increases rapidly if the selling price decreases with cost increase.
2) BE increases with the increase in fixed costs.
3) BE must be obtained to be no profit no loss position.