QUESTION 3

Faithful Ltd. manufactures and sells Protector, a car alarm system. The selling price of Protector is $180.00 per unit. The company sold 60,000 units for the year ended 2019. During the year 2019, the total annual fixed costs was $1,890,000. The companys variable selling expenses was $15.50 per unit. Direct costs for each unit of the product includes direct materials amounting to $55.00 and direct labour of $32.00. The company also incurs variable manufacturing overhead of $23.50 per unit. Ignore income tax considerations.

Required: (a) How many units must Faithful sell in order to breakeven for the year 2019? What is the net profit of Faithful for the year 2019? (6 marks)

(b) In 2020, Faithful plans to reorganize its manufacturing processes. As part of this exercise, its annual total fixed costs will is expected to be $2,940,000, whereas its total variable cost will be $136.50 per unit. Faithful would need to increase the selling price per unit of its product in order to continue to be profitable. The company has decided to set a targeted contribution margin of 35%.

The management is aware that an increase in the selling price would decrease the demand for its product. They estimate a decrease of 5% from the number of units sold in 2019 would likely result from the change in the selling price.

What is Faithfuls new selling price per unit? What is the number of units that Faithful would need to sell in order to achieve a net profit equal to the net profit of 2019? Should the company proceed to reorganize its manufacturing processes? Explain your answer. (Show all necessary calculations to support your answer). (6 marks)

(c) Ignore part (b) data and refer to the original information. Compute the margin of safety in percentage % ie. MOS(%) for the year 2019. What is the MOS(%) if the number of units sold were 75,000 units, assuming all other information remains the same. (3 marks)

(d) In a multiple product cost-volume-profit analysis, many factors needs to be considred when formulating strategies. Using a car accessories company (company that sells car related products) as an example, what information, data, assumptions and predictions would be required to formulate its strategies (assuming the company sells multiple products)? (4 marks)

(e) Explain the term goal congruence with an appropriate illustration. Why is goal / behavioural congruence important and how does responsibility accounting help an organization achieve goal / behavioural congruence? Explain your answer with an appropriate illustration. (3 marks)