Question
Long Weekend Ltd suffered a severe drop in sales and profit performance for the year ended 30 June 2013. The income statement revealed that net
Long Weekend Ltd suffered a severe drop in sales and profit performance for the year ended 30 June 2013. The income statement revealed that net sales were $1500000 with a profit of $310000. Unit sales were 300000, and the total costs were $1190000. A breakdown of costs and expenses:
*Cost of Sales (includes manufacturing costs)
Fixed - 250000
Variable - 600000
Total - 950000
*Selling Expenses
Fixed - 108000
Variable - 36000
Total - 144000
*Admin
Fixed - 72000
Variable - 24000
Total - 96000
In response to the bad result, management is considering a number of options for the year ending 30 June 2014 to try to improve performance. Independent policy options being considered are set out below:
- Update factory machinery and production methods to adjust the mix of fixed and variable cost of sales (which includes manufacturing costs) to 40% fixed and 60% variable.
- Increase the selling price by 15%, with no changes to costs and expenses but unit sales will decrease 10%.
- Change the manner in which sales staff are remunerated. It is proposed to pay sales staff on the basis of base salary of $32000 plus a 5% commission on net sales. The current policy is the pay fixed total salaries of $105000.
Required
A. Calculate break-even point in dollars of sales for the year ended 30 June 2013.
B. Calculate the break-even point and profit for each of the options being considered by management.
C. What action should be recommended to management? Explain why.
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