Answer to Question #277760 in Financial Math for Apple

Question

Queenie Cocoa manufactures nutritious cocoa powder packaged for local market. The product is sold in boxes at RM40 per unit. The cost incurred to manufacture and market the product follows: Cost Schedule:1. Variable Costs per Box (RM) *Direct Unit=12, Direct Labour per unit=6, Manufacturing overhead=5, selling and administrative=3. 2.Fixed Costs(RM): Manufacturing overhead=300,000 and selling and administrative=120,000    

In the first year of its operation, Queenie Cocoa manufactures 50,000 boxes of which 42,000 boxes were sold. (a)   Prepare a contribution margin income statement. (b)  Calculate Queenie’s break-even point in units and ringgit. (c)   Calculate the units that Queenie must sell to achieve an after-tax profit target of RM210,000? Assume the tax rate is 40%. Indicate the margin of safety in units, at this point. (d)  Queenie wishes to incur and additional selling expense of RM35,000, other costs remain constant. Calculate the new break-even point in RM.

Answer 1

a)

Contribution Margin Income Statement:

Sales = $42000\cdot40=1680000$

Variable production expenses = $50000\cdot(12+6+5+3)=1300000$

Contribution margin = Sales - Variable production expenses =

$=1680000-1300000=380000$

Fixed production expenses = $300000+120000=420000$

Net profit = Contribution margin - Fixed production expenses =

$=380000-420000=-40000$

b)

break-even point: profit = 0

x is number of uits

$40x-1300000-420000=0$

$x=1720000/40=43000$ units sold

c)

$40x(1-0.4)-1300000-420000=210000$

$x=1930000/24=80416.67\approx80417$ units sold

margin of safety = (Current Sales Level – Breakeven Point) / Current Sales Level

Current Sales Level = 42000 units

for Breakeven Point:

$40x(1-0.4)-1300000-420000=0$

$x=1720000/24=71666.67\approx71667$

margin of safety = $(42000-71667)/42000=-0.71=-71\%$

d)

$40x(1-0.4)-1300000-420000-35000=0$

$x=1755000/24=73125$ units