Question 8 Sports Co is a large manufacturing company specialising in the manufacture of a wide range of sports equipment treadmills (T), cross trainers (C) and rowing machines (R). Sports Co has experienced considerable variations in sales volumes and variable costs over the past two years, and the general manager believes that the forecast should be carefully evaluated from a cost-volume-profit viewpoint. The preliminary budget information for next year follows. The budgeted sales prices and volumes for the next year are as follows: Treadmills Cross trainers Rowing machines (T) (C) (R) Selling price per unit 1,000 1,200 900 Unit Sales 2,000 3,000 5,000 The budgeted costs for each product are shown below. Treadmills Cross trainers Rowing machines (T) (C) (R) Direct Material 420 400 350 Labour cost 200 300 250 Variable overheads 100 80 50 Labour costs are 40% fixed and 60% variable. General fixed overheads excluding any fixed labour costs are expected to be 270,000 for the next year. Required: a) Present an estimated income statement for the company for the next year based on the budgeted figures above. (5 marks) b) Assuming that the sales mix remains as budgeted, determine how many units of each product must be sold to break even. (6 marks) c) After preparing the original estimates, management determined that variable overhead cost of Cross trainers (C) will increase by 10 percent and direct material cost of Rowing machines (R) will increase by 5 percent. The selling price for Treadmills (T) will go up by 15 percent. In addition, management recently learned that the firm's Rowing machines (R) has been rated as the best value on the market, and the company now expects to sell two times as many Rowing machines (R) as each of the other products. Under these circumstances, determine how many units of each product Sports Co must sell to break even. (7 marks) d) Discuss the main assumptions/limitations of the break-even analysis in making management decisions. (7 marks) (Total: 25 marks) Question 8 Sports Co is a large manufacturing company specialising in the manufacture of a wide range of sports equipment treadmills (T), cross trainers (C) and rowing machines (R). Sports Co has experienced considerable variations in sales volumes and variable costs over the past two years, and the general manager believes that the forecast should be carefully evaluated from a cost-volume-profit viewpoint. The preliminary budget information for next year follows. The budgeted sales prices and volumes for the next year are as follows: Treadmills Cross trainers Rowing machines (T) (C) (R) Selling price per unit 1,000 1,200 900 Unit Sales 2,000 3,000 5,000 The budgeted costs for each product are shown below. Treadmills Cross trainers Rowing machines (T) (C) (R) Direct Material 420 400 350 Labour cost 200 300 250 Variable overheads 100 80 50 Labour costs are 40% fixed and 60% variable. General fixed overheads excluding any fixed labour costs are expected to be 270,000 for the next year. Required: a) Present an estimated income statement for the company for the next year based on the budgeted figures above. (5 marks) b) Assuming that the sales mix remains as budgeted, determine how many units of each product must be sold to break even. (6 marks) c) After preparing the original estimates, management determined that variable overhead cost of Cross trainers (C) will increase by 10 percent and direct material cost of Rowing machines (R) will increase by 5 percent. The selling price for Treadmills (T) will go up by 15 percent. In addition, management recently learned that the firm's Rowing machines (R) has been rated as the best value on the market, and the company now expects to sell two times as many Rowing machines (R) as each of the other products. Under these circumstances, determine how many units of each product Sports Co must sell to break even. (7 marks) d) Discuss the main assumptions/limitations of the break-even analysis in making management decisions. (7 marks) (Total: 25 marks)