Question

A company produces and sells a single product which has the following cost and selling prices

structure
GHS / Unit GHS / Unit
Selling price 120
Direct material 22
Direct labour 36
Variable overheads 14
Fixed overheads 12 84
Profit per unit 36
The fixed overheads absorption rate is based on the normal capacity of 2,000 units per month.
Assume that the same amount is spent each month on fixed overheads. Budgeted sales for next
month are 2,200 units
Required
a. Calculate the breakeven point in sale unit and in value per month
b. Calculate the margin of safety next month
c. Calculate the budgeted profit for next month
d. Calculate the sale level required to achieve a profit margin of 20% after tax of 30%.

Answer 1

Let’s solve the given problem step by step:

a. To calculate the breakeven point in sales units and value per month, we need to find the point where the total revenue equals the total cost. The total cost consists of variable costs and fixed costs. The variable cost per unit is the sum of direct material, direct labor, and variable overheads, which is 22 + 36 + 14 = 72 GHS per unit. The fixed cost per month is 12 * 2000 = 24000 GHS. The selling price per unit is 120 GHS.

Let x be the number of units sold. Then, the total revenue is 120x GHS and the total cost is 72x + 24000 GHS. Setting these two expressions equal to each other, we get 120x = 72x + 24000. Solving for x, we get x = 1000. This means that the breakeven point in sales units is 1000 units per month. The breakeven point in value is 1000 * 120 = 120000 GHS per month.

b. The margin of safety next month is the difference between the budgeted sales and the breakeven point in sales units. Since the budgeted sales for next month are 2200 units and the breakeven point in sales units is 1000 units, the margin of safety next month is 2200 - 1000 = 1200 units.

c. The budgeted profit for next month can be calculated by subtracting the total cost from the total revenue. The total revenue for next month is 2200 * 120 = 264000 GHS. The total variable cost for next month is 2200 * 72 = 158400 GHS. The total fixed cost for next month is 24000 GHS. Therefore, the total cost for next month is 158400 + 24000 = 182400 GHS. Subtracting this from the total revenue, we get a budgeted profit of 264000 - 182400 = 81600 GHS for next month.

d. To calculate the sales level required to achieve a profit margin of 20% after tax of 30%, we need to find the number of units that need to be sold to achieve a certain profit before tax. Let x be the number of units sold. Then, the profit before tax is (120 - 72)x - 24000. Since we want this profit to be equal to (1 - 0.3) * (0.2 * (120x)), we can set up an equation and solve for x. This gives us (120 - 72)x - 24000 = (1 - 0.3) * (0.2 * (120x)). Solving for x, we get x ≈ 2143. This means that to achieve a profit margin of 20% after tax of 30%, approximately 2143 units need to be sold.