Question:
Wen Ltd manufactures setup boxes.
The budgeted data for the next year are as follows:
Minimum expected sales volume: 50,000 boxes. The maximum capacity is 100,000 boxes
Selling price: $27 per box
Variable selling costs: 5% of sales revenue.
Direct materials: $5.70 per box,
Direct variable labour costs: $6 per box,
Variable manufacturing overhead costs: $5.85 per box
Fixed manufacturing costs: $90,000
Fixed selling, general and administration costs: $234,000
New Proposal:
The company is considering the following proposal, both changes expected to be made at
the same time at the beginning of the next year if the management approves it:
Changes to costs made in the new proposal:
• The variable direct labour costs of $6 per box for the production operators is proposed to
be changed to fixed monthly wages, and the total fixed direct labour costs is estimated
at $330,000 next year, and
• The current variable 5% sales commissions are proposed to be replaced with a fixed
allowance that will be included in fixed monthly salaries of the sales personnel. This will
increase total fixed sales salaries by $80,000 next year.
University of London
Required:
(a) Calculate each the following before the new proposal:
(i) Break-even point in units and sales value, (10 marks)
(ii) Sales units and sales value required to achieve the target profit after tax of
$170,150. Tax rate: 17% (10 marks)
(iii) Profit at 50,000 boxes. (5 marks)
(iv) Operating leverage at 50,000 boxes. (5 marks)
(v) Margin of safety in units, dollars and % if the budgeted sales is 50,000
boxes. (15 marks)
(b) At which level of sales will the management of the company be indifferent to the
existing and new proposal? In other words, what is the sales volume that will result
in the same costs and profit with or without the proposed changes? (20 marks)
(c) Advise the management of the company on whether the proposed changes should
be made, with reasons supporting your recommendations. Include in your
answers, the calculation of the revised breakeven point in units and dollars after
the change and compare them to before the changes are proposed. (20 marks)
(d) If the new proposal was adopted and selling price is reduced by 20% to increase
the sales volume to 90,000 boxes, will this strategy of increasing sales be viable?
Calculate the profits and advise the management.
