Question 3

Q-3(a). Taylor Ltd manufactures cricket balls. They currently produce 25000 balls per month but have the capacity to produce 30,000 balls per month. The balls sell for $75 each. The cost to make each ball includes materials of $15 per ball and labour costs of $21 per ball. Variable manufacturing cost is $ 4 per ball. Fixed manufacturing costs total $400,000 per month and fixed selling and administrative costs total $140,000.

Requirements: (Show all workings)

1. Calculate Contribution Margin (CM) in unit and CM ratio for the current production of the business

2. Calculate the Variable cost ratio

3. Calculate the break-even point (in units and in sales amount) for the current monthly production.

4. Calculate the current profit for the month.

5. Calculate the Margin of safety (in units)

6. Taylor Ltd is thinking of buying a new machine which would add $70,000 in fixed costs per month but would reduce the labour costs to $10 per ball. Based on their current monthly production of 25,000 units, should Taylor Ltd buy the machine?

7. A potential customer wants to buy 4,000 balls for $50 each as a one-off purchase. If Warne Ltd accepts the special order, they will need to spend an extra $2 to put the customer's brand name on each ball and an extra $1 per ball for packaging. They will also need to employ a temporary supervisor at $10,000. Advise Taylor Ltd whether they should accept the special order

Q-3b. Fixed cost always remain fixed while variae costs always vary. Do you agree? Explain