1. Kangaroo Cooperative Society manufactures and sells two types of water filters which are high quality and low quality by using its old equipment. The cost structure of water filters are:

High Quality Low Quality

TZS TZS

Selling price per unit 90,000 25,000

Variable cost per unit 80,000 20,000

The sales mix in units is in the ratio of 3:2 for high quality and low quality respectively. The fixed costs per annum are TZS 945,000,000.

Required:

(a) (i) Compute breakeven point in units and in shillings for each type of the water filters

(ii) Compute the margin of safety in units and in shillings for each type of water filters if a total of 210,000 units are sold annually.

(b) Basing on the information in (a) above, the Society is considering buying new production equipment. The new equipment will increase the fixed costs by TZS 181,000,000 per annum and will reduce the variable costs by TZS 9,000 and TZS 5,000 for high quality and low quality respectively.

Required:

(i) Compute new breakeven point in terms of units of each product and indicate how many units of each water filter should be manufactured and sold in order to earn a targeted profit of TZS 28,160,000 per annum.

(ii) Determine the point of indifference between using the Old equipment and the new equipment.

(iii) If the Total sales are expected to be 30,000 units per annum. Should the society buy the new equipment?? Show your computation.

(c) List the assumptions underlying a break-even analysis. (2 Marks)