Prepare :

You are the chief financial analyst of Hercules Manufacturing Limited. The company manufacturesbowls and has been planning to aggressively expand its sales into the Middle Eastern markets. Youhave been tasked to analyse its reports using CVP and provide explanations to the Director, TierraMuller.

The operating statement relating to the month ended September 30, 2019 of Hercules ManufacturingLimited is as follows:

$'000 $'000

Sales 3,300

Direct Materials 726

Direct Labour 374

Production Overheads 798

Total 1898

Gross Profit 1402

Selling Overheads 1042

Net Profit 360

The variable production overheads were $9 per unit while the variable selling overheads were $11 perUnit.

Required:

a) Calculate the contribution margin per unit. (1.5 marks)

b) b) Calculate the breakeven sales in units, and provide one explanation on the usefulness of breakevensales information. (2.5 marks)

c) Calculate the margin of safety in dollars and provide one explanation on the usefulness of marginof safety information. (2.5 marks)

d) The company has a capacity of 30,000 units per year. Management is not happy with the financialperformance for the last year, and one course of action for the coming year were proposed in therecent management meeting:

The sales manager believed that unit volume would increase by 30% with theincurrence of $200,000 on advertising.

Prepare a CVP income statement for the alternative (showing columns for totals only). Would yourecommend this alternative and why? (3 marks)

e) The company has a target net income of $750,000. Assume additional advertising costs will beincurred, what is the required sales in dollars for the company to meet its target? (1.5 marks)

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