Question

Innoelahr86 avatar

noelahr86
6 days ago
Business
College
answered • expert verified
You are the director of creation department in your business, ANGA Ltd. The establishment makes pairs of Kitenge to be offered domestically and internationally The costs need to be incurred in making of a pair of Kitenge are listed below
Direct Materials TZS 1500
Direct labour TZS 1200
Overhead costs TZS 1300

In adding to the aforementioned items, the other expenses are also included as below:
Advertisement TZS 3 million
Salaries TZS 4 million
Rent TZS 5 million

Presently, the firm makes and offers 15,000 pairs of Kitenge at a charge of TZS 5000 each pair.
REQUIRED:
i. Calculate the breakeven in pairs of Kitenge sold and in currency value. [5 Marks]
ii. Determine pairs of Kitenge to be made and offered to bring an earning of TZS 1,000,000?
iii. Determine pairs of Kitenge to be made and offered to bring an after tax earnings of TZS 1,200,000 (Tax rate=30%).
iv. In an effort to increase sales volume, Managing Director, Mr. Dan, proposed a price reduction of 7.4% and the increase of advertisement budget by 20%. Is it worthwhile to undertake the proposed decision, Justify?

Answer 1

To calculate the break-even point in pairs of Kitenge sold and in currency value, we need to use the following formula:

Break-even point (in units) = Fixed costs / (Price - Variable cost per unit)

Variable cost per unit = Direct materials + Direct labour + Overhead costs

Variable cost per unit = 1500 + 1200 + 1300 = 4000

Price per unit is given as TZS 5000

Fixed costs = Advertisement + Salaries + Rent

Fixed costs = 3,000,000 + 4,000,000 + 5,000,000 = 12,000,000

Therefore, the break-even point is:

Break-even point (in units) = 12,000,000 / (5000 - 4000) = 120,000 pairs of Kitenge

The break-even point in currency value is:

Break-even point (in Tzs) = 120,000 x 5000 = 600,000,000 Tzs

ii. To earn TZS 1,000,000, we need to use the following formula:

Profit = Revenue - Cost

1,000,000 = (Price x Quantity) - (Variable cost per unit x Quantity) - Fixed costs

Solving for quantity, we get:

Quantity = (1,000,000 + Fixed costs) / (Price - Variable cost per unit)

Quantity = (1,000,000 + 12,000,000) / (5000 - 4000) = 28,000 pairs of Kitenge

iii. To earn TZS 1,200,000 after tax with a tax rate of 30%, we need to use the following formula:

Profit after tax = Profit before tax - Tax

1,200,000 = Profit before tax - (30% x Profit before tax)

Profit before tax = 1,200,000 / (1 - 0.3) = 1,714,286

Using the profit before tax, we can now use the formula in part ii. to find out the pairs of Kitenge to be made and offered:

Quantity = (Profit before tax + Fixed costs) / (Price - Variable cost per unit)

Quantity = (1,714,286 + 12,000,000) / (5000 - 4000) = 39,238 pairs of Kitenge

To justify if it is worthwhile to undertake the proposed decision of reducing price by 7.