Joseph Ltd manufactures Zaxo boxes. The company operates in a highly competitive market and a tight labour market. The maximum capacity of the company is 100,000 boxes.

The budgeted data of Joseph Ltd for the next year are as follows:

Selling price: $27 per box

Budgeted sales volume: 60,000 boxes

Direct materials: $5.70 per box,

Direct labour costs: $6 per box,

Variable manufacturing overheads is $5.85 per box

Variable selling costs is 5% of sales revenue.

Total fixed manufacturing costs: $90,000

Total fixed selling, general and administration costs: $234,000

The company is considering the following changes in a new proposal:

(i) The variable direct labour costs of $6 per box for the production operators is proposed to be changed to fixed monthly wages, and the total fixed direct labour costs is estimated at $330,000 next year.

(ii) The current fixed salaries plus variable 5% sales commissions of all sales personnel are proposed to be converted to fixed monthly salaries. This is expected to increase total fixed sales salaries by $80,000 next year.

Required:

(a) Calculate the following before the new proposals:

(i) The break-even point in units.

(ii) The break-even point in sales value.

(iii) The sales units and sales value required to achieve the target profit after tax of $170,150. Tax rate: 17%

(iv) Profit at 60,000 boxes

(v) The operating leverage.

(vi) Margin of safety in units

(vii) Margin of safety in dollars

(viii) Margin of safety ratio in %

(b) At what level of sales (round to whole units) will the total costs be the same regardless of the existing or the new proposal?

(c) Calculate the revised operating leverage, breakeven point in units and dollars of the changes in the new proposal and advise the management of Joseph Ltd on whether they should adopt the new proposal.

(d)The company plans to reduce selling price by 20% to increase the sales volume to 90,000 boxes to adopt the new proposal. Calculate the profits and advise the management.