QUESTION 1 ABC Ltd., a maker of light switches, has experienced a steady growth in sales for the past three years. The company's management accountant has prepared the following data for the current year, 2021: Variable cost: Direct labour 12 per light switch Direct materials 5 per light switch Variable overhead 3 per light switch Total variable costs 20 per light switch Fixed costs: Manufacturing 50,000 Selling 30,000 Administrative 80,000 Total fixed costs 160,000 Selling price 30 per light switch Expected sales, 2021 (30,000 light switches) 900,000 Tax rate: 10% REQUIRED: (a) Using the information provided above: (1) Calculate the projected after-tax profit for 2021. (5 marks) (ii) Calculate the after-tax break-even point in units and sales revenue for 2021. (4 marks) (b) ABC Ltd. has set the sales target for 2022 at a level of 1,200,000 (or 40,000 light switches). To attain this target, the company plans to spend an additional selling expense of 50,000 for advertising, with all other costs and tax rate remaining constant. (1) Calculate the after-tax profit for 2022. (5 marks) 2. Please turn over (1) Calculate the after-tax break-even point in units and sales revenue for 2022. (ii) Calculate the after-tax break-even point in units and sales revenue for 2022. (4 marks) (ii) For 2022, calculate the sales level in units and sales revenue required to generate the same after-tax profit as for 2021. (5 marks) Define operating leverage in words without using the formula and explain how the advertising campaign affects the operating leverage and profit of this company. (6 marks; max 210 words) (iv) Calculate the maximum amount the company can spend on the advertising campaign in 2022 to earn an after-tax profit of 90,000. Assume a sales level of 40,000 light switches. (6 marks) (C) The cost structure of service industries is different from that of manufacturing. Compare the costs of transporting the first passenger and the incremental costs of transporting another passenger in an airline. (4 marks; max 140 words) Explain how high operating leverage has affected the airline industry during this pandemic. Ensure you provide an airline example. (8 marks; max 280 words) Regardless of industry, explain why raising selling prices may not be a feasible option in many cases. (3 marks; max 105 words)
