CONFIDENTIAL BPA 11403 Q1 The condensed income statement of Riverina Sdn Bhd for 2018 is as follows: RIVERINA SDN BHD Income Statement For the year ended December 31, 2018 RM RM 1,500,000 (1,200,000) 300,000 Sales (300,000 units) Cost of goods sold Gross Profit Less : Operating expenses Selling Administration Financial 275,000 180,000 15,000 (470,000) Net income/loss) (170,000) A cost behavior analysis indicates the following allocation of cost for 300,000 units as per Table Q1(a) below: Table Q1(a): Cost information Item Variable Fixed Cost of goods sold Selling expenses Administrative expenses Total Cost (RM) 1,200,000 275.000 180,000 70 % 60% 25% 30% 40% 75% The management has come up with two plan proposals that might help the business out of the red and improve profitability. However each plan proposal will have different effects on the costs. Plan 1: It was proposed that the quality of the product could be substantially improved by spending RM0.55 more per unit on better raw materials. The selling price per unit could be increased to RM6.00 due to competitive pressures. Sales volume is estimated to increase by 30%. The percentage of allocation for all the costs remains the same. Selling expenses and administrative expenses total cost also does not change. Plan 2 : Another alternative is to increase the selling expenses by increasing the variable selling expenses to RM0.65 per unit and increase fixed selling expenses by RM20,000. The selling price per unit will be lowered by RM0.20. It is expected that the changes would increase sales volume by 50%. Total costs and cost allocations of other cost items remains unchanged. 2. CONFIDENTIAL CONFIDENTIAL BPA 11403 (a) Calculate the break even point in dollars for : (i) Plan 1. (8 marks) Plan 2. (8 marks) (b) Compute the sales in dollars to be achieved for both plans assuming that the management targets a net profit of RM120,000. (3 marks) (c) Determine the margin of safety ratio for both alternatives. (4 marks) (d) Identify the best alternative that the management of Riverina Sdn Bhd should take based on the answers of Q1(b) and Q1(c) (2 marks)