Otjomuise Ltd manufactures and sells a single item of farm machinery, which is distributed through a network, at a sales price of N$1,250 per item. The budgeted sales for the year 2017 year are 36 000 units, which represents 60% of the firm's capacity. The following production information has been provided: N$ Direct Materials 17,820,000 Direct labour 1,980,000 Production Overhead- fixed 12,740,000 - Variable 1,226,000 Sales/ Distribution Overhead- Fixed 2,110,000 - Variable 214,000 Your are requiredd to: a) Calculate the breakeven cost in units and sales revenue b) Define and calculate the margin of safety expressed in % terms c) The sales Director proposes to expand to 80% capacity by reducing the sales price by 10% and spending an additional N$3,000,000 on advertising. Calculate the impact of this proposal on breakeven, margin of safety and profitability and advise management whether this proposal should be accepted
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Otjomuise Ltd manufactures and sells a single item of farm machinery, which is distributed through a network, at a sales price of N$1,250 per item. The budgeted sales for the year 2017 year are 36 000 units, which represents 60% of the firm's capacity. The following production information has been provided:
| N$ | |
| Direct Materials | 17,820,000 |
| Direct labour | 1,980,000 |
| Production Overhead- fixed | 12,740,000 |
| - Variable | 1,226,000 |
| Sales/ Distribution Overhead- Fixed | 2,110,000 |
| - Variable | 214,000 |
Your are requiredd to:
a) Calculate the breakeven cost in units and sales revenue
b) Define and calculate the margin of safety expressed in % terms
c) The sales Director proposes to expand to 80% capacity by reducing the sales price by 10% and spending an additional N$3,000,000 on advertising. Calculate the impact of this proposal on breakeven, margin of safety and profitability and advise management whether this proposal should be accepted
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