Part 1

Carnival Handy Bag Limited (Handy Bag) manufactures and sells a single product. The following information is available for three years ending 30 September

Price per Unit volume

unit 000s

Sales $

Actual 2011 130 50

Forecast 2012 129 52

Forecast 2013 128.5 53

Costs per unit Actual Forecast

Produced 2011 2012 2013

$ $ $

Direct materials 50 55 55

Direct labour 30 31.5 33

Variable production overhead 10 11 12

Direct expenses 5 5 6

Variable sales overhead 15 16 16

Other costs for the year $ $ $

000 000 000

Fixed production overhead 50 55 55

Other fixed overhead 200 220 220

Additional information:

1. When the management of Handy Bag prepared its direct labour forecast unit cost

for 2012 and 2013, direct wages were increased only by the forecast rate of

inflation

2. The trade union representatives of the production workers wished to press for a

greater wage increase. They suggested that:

I. Direct wages be increased at twice the rate of inflation. The effect of this

would be to increase direct labour costs per unit as follows:

2012 2013

$ $

Direct labour 33.0 35.0

II. Unit selling prices be increased in order to cover the increased labour costs.

3. It is to be assumed that all expense and revenue relationships will be unchanged

except where indicated

Required:

A. A schedule for 2011, 2012, 2013 for Handy Bag Ltd showing:

1. the break-even points;

2. the net profit for each year.

Base your calculations on the original labour costs.

B. A graph showing a break-even point for 2012.

C. Advise Handy Bag management as to their response to the trade unions claim for

higher wages. Include relevant financial analysis

D. Explain the limitation of break-even analysis in the context of the question.

Part 2

Handy Bag also produces 1,000 bags for export per month for a fixed cost of $300,000 and variable cost of $500 per unit. Its current demand is 600 units which it sells at $1,000 per unit. It is approached by Man Purse Limited for an order of 200 units at $700 per unit.

Should Handy Bag accept the order and why?