Question 2

Myson Ltd is a company that manufactures household appliances sold in department stores. The company has experienced a lot of variation in sales volumes and variable costs over the past few years with its 3 models of oven toaster: B1000, B2020 and C2000. The Financial Controller of Myson has hired you to help them better understand the profitability based on current costs and revenues earning on their toaster products. Budgeted budget information for their three toaster products for the coming year (20X8) is presented in the table below:

For the budgeted year, fixed factory overheads are estimated to be $1,500,000, with fixed, selling and administration expenses totalling $200,000. The company tax rate is 30%. Based on this information, the companys aftertax target profit is $2,975,000.

Required (13 marks total)

1. (a) How many units of each product model must be sold to achieve the target net profit for 20X8 (assuming sales mix is constant). (4 marks) (Hint: Total units to achieve target = 200,000)
2. (b) After analysing the given information above, the company has come to the conclusion that variable manufacturing cost of C2000 may increase by 25%, while the variable selling cost of B2020 could increase by $1.50 per unit. The Financial Controller is hesitant to increase prices to cover these potential cost increases. But on the positive side, C2000 could likely sell three times as many as the other two models, due to its growing popularity in the market. Calculate and explain the effect on achieving the target profit of these scenario changes. (4 marks) (Hint: Total units to Achieve target =230,175)

(c) What assumptions have to hold for this CVP analysis to be meaningful? How does ActivityBased CVP analysis help to address any of these assumptions? (5 marks)