ABC Ltd., a maker of light switches, has experienced a steady growth in sales for the past three years. The companys management accountant has prepared the following data for the current year, 2021:

Variable cost: Direct labour Direct materials Variable overhead

Total variable costs Fixed costs:

12 per light switch 5 per light switch 3 per light switch

20 per light switch

Manufacturing 50,000 Selling 30,000 Administrative 80,000

Total fixed costs 160,000

30 per light switch Expected sales, 2021 (30,000 light switches) 900,000

Selling price Tax rate: 10%

REQUIRED: Please note: a maximum word count applies to some parts of this question.

(a) Using the information provided above: (i) Calculate the projected after-tax profit for 2021.

(5 marks)

(ii) Calculatetheafter-taxbreak-evenpointinunitsandsalesrevenuefor2021. (4 marks)

(b) ABC Ltd. has set the sales target for 2022 at a level of 1,200,000 (or 40,000 light switches). To attain this target, the company plans to spend an additional selling expense of 50,000 for advertising, with all other costs and tax rate remaining constant.

(i) Calculate the after-tax profit for 2022.

(5 marks)

2

Please turn over

2. (ii) Calculatetheafter-taxbreak-evenpointinunitsandsalesrevenuefor2022. (4 marks)

3. (iii) For 2022, calculate the sales level in units and sales revenue required to

generate the same after-tax profit as for 2021.

(5 marks)

Define operating leverage in words without using the formula and explain how the advertising campaign affects the operating leverage and profit of this

company.

(6 marks; max 210 words)

(iv) Calculate the maximum amount the company can spend on the advertising campaign in 2022 to earn an after-tax profit of 90,000. Assume a sales level

of 40,000 light switches.

(6 marks)

(c) The cost structure of service industries is different from that of manufacturing. Compare the costs of transporting the first passenger and the incremental costs of

transporting another passenger in an airline. Explain how high operating leverage has affected the airline industry during this

pandemic. Ensure you provide an airline example.

(8 marks; max 280 words)

Regardless of industry, explain why raising selling prices may not be a feasible

option in many cases.