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Cole Ltd has the capacity to produce 60,000 units each year. However next year it expects to operate at only 75% of capacity. The budgeted
Cole Ltd has the capacity to produce 60,000 units each year. However next year it expects to operate at only 75% of capacity. The budgeted profit statement for next year is as follows: Sales (45,000 units at 37.50) 1,687,500 Direct materials 360,000 Direct labour 270,000 Variable production overhead 180,000 Fixed production overhead 133,500 (943,500) Gross profit 744,000 Variable selling costs 90,000 Fixed selling costs 60,000 (150,000) Net profit 594,000 Required: (a) Based on the budgeted figures above, calculate: (i) The sales revenue needed to break-even. (ii) The margin of safety expressed as a percentage of sales revenue. (iii) The number of units that would have to be sold to earn a profit of 28,000. (iv) The profit that would be earned if the company operated at 90% of full capacity. (b) The company is thinking of modifying its production process for next year. The modification would be ready for the start of the year. The modification would incur extra fixed production overheads of 75,000 for the next year but would reduce the direct labor cost of each unit by 2.25. Required: Comment on whether they should go ahead with the modification
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