Question 1

AJ Ltd plans to manufacture a new product. The Finance team and the Sales department have projected the following information:

Selling price	$10.00 per unit	100%
Variable cost	-$7.00 per unit	70%
Contribution Margin	$3.00 per unit	30%
Total Fixed Cost	$300,000 per annum

AJ Ltd has the following policies:

• Finance team is required to calculate the sales breakeven dollar amount before commencing any new production.
• Sales department should provide any relevant information (such as projected sales price) based on the current market situation to facilitate the budget preparation.
• Key guidelines communicated to the management team including strategic direction, project development and targets
• Bonuses are determined based on achievement of favourable actual results compared to budget
• Senior managers present operational and investment proposals based on targets, Return on investment and other Key Performance Indicators (KPIs).
• Final budget is documented and presented/deployed to responsible managers/staff.

Required:

(a) Calculate the sales breakeven in dollars: (show your workings)

(b) Prepare a projected Income Statement at a sales volume of 160,000 units:

Projected Income Statement
Sales volume	160,000 units
Sales revenue	1,600,000
Less: Variable costs	-1,120,000
Contribution Margin	480,000
Less: Fixed costs	-300,000
Profit before Tax	180,000

(c)What is the purpose or goal of calculating the sales breakeven dollar amounts and the purpose or goal of preparing the above projected income statement?

Is to calculate the number of units sold to pay all fixed and variable costs . any sales above breakeven point contribute to profit.

(d)If the sales breakeven dollar amount is calculated after the production line has commenced, is this consistent with the company's policies?

1. Yes
2. no

The answer should be ___no__

(e) (i) Shortly after AJ Ltd introduced its new product in the market, the growth in demand for its product resulted in a new competitor entering the market with a comparable product. To retain customers, AJ Ltd had to engage in a price war to reduce its selling price to $9 per unit. The costs associated with the new production line remains the same as the projections.

Given the change in the current market situation, review the original projected income statement from question (b) and update the projected or forecast income statement below:

Projected Income Statement
Sales volume	160,000 units
Sales revenue	1,440,000
Less: Variable costs	1,120,000
Contribution Margin	320,000
Less: Fixed costs	300,000
Profit before Tax	20,000

(e) (ii) Looking at the change in the forecast profit before tax resulting from the growth in market demand and the consequential price war, do you think that AJ Ltd should reduce its selling price to $9 per unit? Justify your response.

(f)Determining the impact on profits and/or cashflows as a result of anticipated changes to the sales price is an example of what type of statistical analysis?

1. sensitivity analysis
2. sales analysis
3. mean variance analysis
4. central limit theorem

The answer should be _____

(g)Review AJ LTd's company polices as they relate to the budget processes and identify one of those policies that may result in the forecasts being under-estimated for sales revenue and/or over-estimated for costs. Explain.

(h)Briefly explain how you could implement a change to the budget process that would improve the process by dealing with the policy you identified in part (g).