QUESTION $3$

$(20$ Marks$)$

$3\mathrm{.}1$

REQUIRED

Study the information given below and answer each of the following questions independently. The expanded contribution margin model must be used to answer questions $3\mathrm{.}1\mathrm{.}2$ and $3\mathrm{.}1\mathrm{.}3.$

$3\mathrm{.}1\mathrm{.}1$

Calculate the margin of safety $($as a percentage, expressed to two decimal places$).$

$(4$ marks$)$

$3\mathrm{.}1\mathrm{.}2$

Calculate the number of units that must be sold if the company desires an operating profit of R$2700000.$

$(4$ marks$)$

$3\mathrm{.}1\mathrm{.}3$

Suppose the company wants to spend an additional R$240000$ on advertising and reduce the selling price by R$8$ per unit, with the expectation that the sales volume will increase by $20\%.$ Is this a good idea? Motivate your answer.

$(4$ marks$)$

INFORMATION

Viking Ltd manufactures a product that sells for R$108$ each. Production and sales are presently $100000$ units per year. Variable manufacturing costs are R$54\mathrm{.}60$ per unit, of which R$10\mathrm{.}00$ per unit are for overheads. Salespersons earn a commission of $5\%$ of sales. Fixed costs amount to R$2720000$ for manufacturing overheads and R$1180000$ for selling and administrative activities.

$3\mathrm{.}2$

REQUIRED

Use the information given below to calculate the following. The expanded contribution margin model must be used to answer questions $3\mathrm{.}2\mathrm{.}2$ and $3\mathrm{.}2\mathrm{.}3.$

$3\mathrm{.}2\mathrm{.}1$

Variable costs per unit

$(2$ marks$)$

$3\mathrm{.}2\mathrm{.}2$

Break$-$even value using the contribution margin ratio

$(2$ marks$)$

$3\mathrm{.}2\mathrm{.}3$

Selling price per unit that will enable the company to break even if the variable costs amount to R$260$ per unit. $($Ignore the contribution margin ratio of $40\%.)$

$(4$ marks$)$

INFORMATION

The following information regarding a product manufactured by Abel Limited is available:

Fixed costs per annum

R$2000000$

Selling price per unit

R$400$

Contribution margin ratio

$40\%$

Expected sales are $20000$ units.