Menlo Company manufactures and sells a single product. The following information has been provided to you: Profit and loss account for the year ended 31 Dec 2017: £ £ £ Sales 3,000,000 Production costs: Direct materials 300,000 Direct labour 1,387,500 Variable overhead 150,000 Fixed overhead 525,000 Total production costs: 2,362,500 Fixed administration overhead 240,000 Selling and distribution costs: Sales commission (2% of sales) 60,000 Variable distribution costs 127,500 Fixed advertising costs 90,000 277,500 2,880,000 Profit 120,000 The company sold 150,000 units last year at a selling price of £20.00 per unit. Required: As the company’s newly appointed management accountant, you are asked to calculate: (d) The effect on breakeven point if the company had to reduce the selling price by 15%. (e) The company is considering changing one of their component parts which will increase the unit variable cost by £2.25. If they hold the selling price constant per unit and make the proposed changes to the variable costs, calculate the number of units that must be sold to breakeven. (f) What is meant by a product’s contribution margin (CM) ratio? How is this ratio useful in planning business operations?
Menlo Company manufactures and sells a single product. The following information has been provided to you:
|
£ |
£ |
£ |
||
| Sales | 3,000,000 | |||
|
|
Production costs: |
|||
|
|
Direct materials |
300,000 | ||
|
|
Direct labour |
1,387,500 | ||
|
|
Variable |
150,000 | ||
|
|
Fixed overhead |
525,000 | ||
|
|
Total production costs: |
2,362,500 | ||
|
|
Fixed administration overhead |
240,000 | ||
|
|
Selling and distribution costs: |
|||
|
|
Sales commission (2% of sales) |
60,000 | ||
|
|
Variable distribution costs |
127,500 | ||
|
|
Fixed advertising costs |
90,000 | ||
|
|
277,500 | |||
|
|
2,880,000 | |||
|
|
Profit | 120,000 | ||
|
|
||||
|
|
The company sold 150,000 units last year at a selling price of £20.00 per unit.
Required:
As the company’s newly appointed
(d) The effect on breakeven point if the company had to reduce the selling price by 15%.
(e) The company is considering changing one of their component parts which will increase the unit variable cost by £2.25. If they hold the selling price constant per unit and make the proposed changes to the variable costs, calculate the number of units that must be sold to breakeven.
(f) What is meant by a product’s contribution margin (CM) ratio? How is this ratio useful in planning business operations?
Trending now
This is a popular solution!
Step by step
Solved in 4 steps
