Question

A retail dealer in garments is currently selling 24,000 shirts annually. He supplies the following details for the year ended 31st March 2007. Selling price per shirt: P800 Variable cost per shirt: P600 Fixed Cost: Staff salaries: P2 400 000 General Office Cost: P800, 000 Advertising Cost: P800, 000 REQUIRED: a) Calculate Break-even Point in sales revenue and number of shirts sold. b) What is the margin of safety of the dealer expressed as a percentage . c) Assume that 30, 000 shirts were sold during the year, find out the net profit of the firm. d) Assuming that in the coming year, an additional staff salary of P1,000, 000 is anticipated, and price of shirt is likely to be increased by 15%, what should be the break-even point in number of shirts and sales? e) If taxation rate is 12.5%, and fixed cost increase to 6 000 000 what is the level of sales that must be achieved to a targeted profit of P8 000 000.

Answer 1

To calculate the break-even point in sales revenue and number of shirts sold, divide the fixed cost by the contribution margin per shirt. The margin of safety is the difference between actual sales volume and break-even sales volume. For a target profit of P8,000,000 with a taxation rate of 12.5% and fixed costs increasing to P6,000,000, sales revenue must be P23,600,000.

Step-by-step explanation:

To calculate the break-even point in sales revenue and number of shirts sold, we need to consider the fixed cost, variable cost, and selling price per shirt. The fixed cost is the sum of staff salaries, general office cost, and advertising cost, which is P2,400,000 + P800,000 + P800,000 = P4,000,000. The variable cost per shirt is P600. The contribution margin per shirt is the selling price minus the variable cost, which is P800 - P600 = P200. The break-even point can be calculated by dividing the fixed cost by the contribution margin per shirt. Therefore, the break-even point in sales revenue is P4,000,000 / P200 = P20,000,000, and the break-even point in the number of shirts sold is P4,000,000 / P200 = 20,000 shirts.

The margin of safety is the difference between the actual sales volume and the break-even sales volume, expressed as a percentage. The actual sales volume is 24,000 shirts, and the break-even sales volume is 20,000 shirts. Therefore, the margin of safety is (24,000 - 20,000) / 24,000 x 100% = 16.67%.

To find out the net profit of the firm when 30,000 shirts were sold during the year, we can subtract the total cost from the total revenue. The total revenue is calculated by multiplying the selling price per shirt by the number of shirts sold, which is P800 x 30,000 = P24,000,000. The total cost is the sum of the fixed cost and the variable cost, which is P4,000,000 + (P600 x 30,000) = P22,800,000. Therefore, the net profit of the firm is P24,000,000 - P22,800,000 = P1,200,000.

If an additional staff salary of P1,000,000 is anticipated and the price of the shirt is likely to be increased by 15%, the new fixed cost would be P4,000,000 + P1,000,000 = P5,000,000, and the new selling price would be P800 + (P800 x 15%) = P920. To calculate the new break-even point in number of shirts, we divide the new fixed cost by the contribution margin per shirt, which is (P5,000,000) / (P920 - P600) = 7,692.31 shirts. The new break-even point in sales revenue is then (7,692.31 shirts) x (P920) = P7,089,231.54.

To achieve a target profit of P8,000,000, with a taxation rate of 12.5% and fixed costs increasing to P6,000,000, we can use the formula: Target Profit = (Sales Revenue - Total Cost) x (1 - Taxation Rate). Rearranging the formula, we get Sales Revenue = (Target Profit / (1 - Taxation Rate)) + Total Cost. Substituting the values, we have Sales Revenue = (P8,000,000 / (1 - 0.125)) + P6,000,000 = P17,600,000 + P6,000,000 = P23,600,000.

Answer 2

a) Calculate Break-even Point in sales revenue and number of shirts sold.

• 20,000 shirts
• $16,000,000

b) What is the margin of safety of the dealer expressed as a percentage .

• 16.67%

c) Assume that 30, 000 shirts were sold during the year, find out the net profit of the firm.

• $2,000,000

d) Assuming that in the coming year, an additional staff salary of P1,000, 000 is anticipated, and price of shirt is likely to be increased by 15%, what should be the break-even point in number of shirts and sales?

• 15,625 shirts
• $14,375,000

e) If taxation rate is 12.5%, and fixed cost increase to 6 000 000 what is the level of sales that must be achieved to a targeted profit of P8 000 000.

• 47,322 shirts
• $43,536,240

Step-by-step explanation:

selling price per shirt $800 x 24,000 = $19,200,000

variable cost per shirt $600 x 24,000 = $14,400,000

total fixed costs $4,000,000

net income $800,000

contribution margin per unit = $800 - $600 = $200

break even point = $4,000,000 / $200 = 20,000 shirts x $800 = $16,000,000

margin of safety = (current sales - break even point) / current sales = ($19,200,000 - $16,000,000) / $19,200,000 = 16.67%

if 30,000 shirts were sold:

contribution margin 30,000 x $200 = $6,000,000

fixed costs $4,000,000

net income $2,000,000

if sales price increases to $920, contribution margin = $320

fixed costs increase to $5,000,000

break even point = $5,000,000 / 320 = 15,625 shirts x $920 = $14,375,000

fixed costs increase to %6,000,000

targeted profit $8,000,000 + tax rate = $9,142,857

sales target = ($6,000,000 + $9,142,857) / $320 = 47,321.43 ≈ 47,322 shirts