QUESTION 2 (20 marks)

a) COST - VOLUME - PROFIT ANALYSIS (12 marks)

Protest Industries produces only one product. The following revenues and cost have been estimated for the forthcoming month:

Selling price, $ 117 per unit (SP) Variable cost, $ 78 per unit (VC)

Fixed Cost, $ 78,000

The managers of the firm wish to know the following:

1.Calculate contribution margin per unit

2.Calculate contribution margin ratio.

3.BEP in units and Dollars

4.Calculate margin of safety if actual sales are 6,000 units

5.Prepare Break-even chart using above information

6.Calculate how many units must be sold to get a profit of $156,000.

QUESTION 2 (b)Make or buy Decision (4 marks)

Consider the following scenarios for Decision Making:

1.Sparks Ltd produces three products: A, B and C. The following is an estimate of costs and revenue for the forthcoming year:

A

B

C

$

$

$

Sales

Total Cost

Net Profit (loss)

41,000

48,000

(7,000)

75,000

67,000

8,000

48,000

42,000

6,000

The total cost of each product comprises one - third fixed costs and two - third variable costs. Fixed costs are constant whatever the volume of sales. The managing director argues that because product A makes a loss, production of it should be discontinued.

Comment on the managing director's argument.

2.Thunder company has been producing 15000 units of part 3741 for its products. The unit cost for the part is as follows: (4 marks)

$

Direct materials

Direct Labour

Variable manufacturing overhead

Fixed manufacturing overhead

Total

7

13

9

10

39

Thunder can purchase 15000 units of part 3741 for $ 34 each. If the part is purchased, Thunder can make another product and provide a contribution margin of $15000. If the part is purchased, 75% of the fixed manufacturing overhead costs will still be incurred.

Required

Should Thunder make or buy the part?