Answer to Question #135513 in Financial Math for thully

Question

Calculate the break-even value using the marginal income ratio.

1.2 The sales manager proposes a R2 per unit reduction in selling price with the

expectation that this would increase sales by 2 000 units. Is this a good idea?

Motivate your answer.

(4 marks)

1.3 Determine the selling price per unit if a net profit of R486 000 is desired.

INFORMATION

The following forecasts for January 2021 were provided by Walton's Manufacturers:

Sales (36 000 units) ----------------------------------------R1080 000

Direct materials cost per unit ----------------------------R8

Direct labour cost per unit ---------------------------------R5

Variable manufacturing overhead costs per unit ----------R2

Fixed manufacturing overheads -------------------------------R150 000

Fixed marketing and administrative costs--------------------R120 000

Sales commission ------------------------------R10% OF SALES

Answer 1

From the information given we need to do our calculation first in windows excel as shown below

$Q_1$ Calculate the break even value using the marginal income ratio?

$BEP=\frac{total fixed cost}{contribution margin ratio}$

=$\frac{270000}{40}=R675000$

$Q_2$ No, this would decrease the income by R44,400.This is because the total sales went down while the expenses remained almost the same , making an overall reduction of profit

sales went down from 1,080,000 to 1,064,000 while expenses were .The profit generated in the first case was

$162,000$ while in the second case was 117,600. So there was a reduction$(162000-117600)=44400$ of this amount on profit

$Q_3$ selling price per unit if a net profit of R486000 is desired

=$=\frac{total sales}{number of units}=\frac{1344600}{36000}=37.35$