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(22 marks) QUESTION 1 Sheefeni CC normally produces and sells 40 000 units of product A each year. The companys cost structu
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Answer #1
a) Production of
Particulars 40,000 units 48000 units
Sales $ 1,400,000.00 $ 1,680,000.00
(40000 x $ 35) (48000 x $ 35)
Less: Variable Costs:
D.Materials $      320,000.00 $      384,000.00
(40000 x $ 8) (48000 x $ 8)
D.Labor $      360,000.00 $      432,000.00
(40000 x $ 9) (48000 x $ 9)
Variable OH $        40,000.00 $        48,000.00
(40000 x $ 1) (48000 x $ 1)
Variable selling exp $        80,000.00 $        96,000.00
(40000 x $ 2) (48000 x $ 2)
Contribution $      600,000.00 $      720,000.00
Less: Fixed Costs:
Fixed OH $      280,000.00 $      280,000.00
(W.N) (W.N)
Fixed selling exp $      120,000.00 $      160,000.00
(Given) (120000 x 133.33333%)
Profit $      200,000.00 $      280,000.00
As it can be seen that if the changes are brought into effect,
the company will earn an extra profit of $ 80,000.
So, it is recommended to bring the change.
Workings Note:
Variable production OH cost per unit = Change in total OH = $ 320000 - $ 310000
Change in units produced 40,000 units - 30,000 units
= $       1.00 per unit
Therefore fixed production OH = $ 320,000 - (40000 units x $ 1)
= $280,000
b)
Total variable cost p.u
D.Materials $               8.00
D.Labor $               9.00
V.OH $               1.00
V.Selling exp $               2.00
Shipping cost $               3.50
$            23.50
Volume of Production 50000 units
Total Fixed Costs
Import duties, foreign permits $      9,000.00
Fixed OH $ 280,000.00
Fixed selling exp $ 120,000.00
$ 409,000.00
Break Even selling price = (Total Fixed Cost / Production unit volume) + Variable cost per unit
= ( $ 409,000 / 50,000 units ) + $ 23.50
= $    31.68
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