April 2021

Fast Fandango Ltd. manufactures a single product, a steel poker which sells for $10. At 75% capacity, which is the normal level of activity for the factory, sales are $600,000.

The cost of sales are:

Prime cost $3

Production overhead $156,000 (including variable costs of $30,000)

Sales costs $80,000

Distribution costs $60,000 (including variable costs of $15,000)

Administration overhead $40,000 (including variable costs of $9,000)

The sales costs are fixed with the exception of sales commission which is 5% of sales value

Required:

a) Calculate the break-even volume of sales

b) Prepare statements to show the revenue, contribution and profit:

i. at the normal level of activity

ii. if the sales price is reduced by 5% and the sales volume thereby increased by 16 2/3% above the normal level of activity

iii. if the sales price is reduced by 7% and the sales volume thereby increased by 20% above the normal level of activity

c) calculate the C/S ratio in each instance in (b) above

d) Determine what the sales volume would need to be under the sales price arrangements in (b) (iii) for the profit to be the same as in (b) (ii).