Question 2

Norton Ltd manufactures a single product, which is sold for $150 per unit.

The standard variable costs per unit of the product are:

Direct material 4 kilos at $8 per kilo

Direct labour 5 hours at $10 per hour

Production overhead $2.5 per direct labour hour

Sales overhead $5 per unit

The company expects to manufacture and sell 8,000 units in total during the

forthcoming year (Year 1).

The fixed overhead costs for the forthcoming year are:

$

Production 60,000

Administration 35,000

Sales 11,000

Required:

(a) Calculate profit in Total for Year 1 (5 marks)

(b) Calculate for the forthcoming year (Year 1):

(i) The break-even point in dollars and units

(ii) The margin of safety in dollars and units

(iii) The amount of sales in units that would earn the company a profit of $180,000

(12 marks)

(c) The following cost increases are expected in the following year (Year 2):

Variable costs: +10%

Fixed Cost: +8%

Required:

Calculate for Year 2:

(i) The break-even point in units and dollars using the variable and fixed cost

calculated in (c) above. (5 marks)

(ii) The amount of sales in units to earn the company a profit of $180,000 if the

selling price was raised to $150. (3 marks)

(Total 25 mar