Premium Leather has been in the clothing market for the last 10 years and operates in an industry which is very competitive and volatile. The following information on Premium and its product portfolio is available figures are per annum:
Question 1 (40 marks) Premium Leather has been in the clothing market for the last 10 years and operates in an industry which is very competitive and volatile. The following information on Premium and its product portfolio is available - figures are per annum: Bags Variable cost (excluding Material Selling price per material cost) (leather) per Products Sales in unit unit per unit unit S S Meter 11.250 400 150 1.00 Belts 12,000 125 50 0.25 Shoes 16.000 150 65 0.50 + Leather is a major ingredient and regularly used in the production of all the products above. Leather used in production is bought from a supplier for $60 per meter. Fixed cost per annum is $2,300,000. The CFO of Premium has heard that break-even analysis could be used to assess the risks of the business and helps decision making. You are asked to help him in the analysis. Required: a. Calculate the contribution margin per unit for the 3 products. (3 marks) b. Prepare a contribution margin income statement in thousands dollars. (6 marks) Calculate the contribution margin ratio. Calculate, and briefly explain the significance of the break-even in dollar sales and margin of safety in percentage. (7 marks) d. What is meant by the term operating leverage? Calculate the degree of operating leverage. (4 marks) What is the percentage increase in sales in order to earn a target profit of $3 million, assume a constant sales mix? (3 marks) Explain how the unavailability of leather and the rise in its price affect the profitability, risk and break-even point of Premium. Answer verbally. (5 marks) . In the coming month, the supplier can only supply 1.500 meters of the leather at a cost of $72 per meter to Premium which is not sufficient to meet the potential demand for the month. The potential demand in the coming month for the 3 products are as follows: bags 800 units, belts 1.000 units and shoes 1.200 units. Compute the contribution margin per unit of the constraining resource and determine which products and the amount of the products Premium should produce to maximize its net operating income. (10 marks)
