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QUESTION FOUR: COST-VOLUME-PROFIT ANALYSIS [25 MARKS] VR Tech (Pty) Ltd was established to assembly and sell Virtual Reality Headsets in 2008. There is now increased

QUESTION FOUR: COST-VOLUME-PROFIT ANALYSIS [25 MARKS] VR Tech (Pty) Ltd was established to assembly and sell Virtual Reality Headsets in 2008. There is now increased competition in its markets and the company expects to it difficult to make an acceptable profit next year. You have been appointed as an accounting technician at the company, and the financial controller has given you the following copy of the draft budget for the next financial year.

Draft budget for 12 months to 31 March

R R
Sales income 960 000
Cost of sales: (782 200
Variable assembly materials 374 400
Variable labour 192 000
Factory overheads:
variable 172 800
Fixed 43 000
Gross profit 177 800
Selling overheads
commission 38 400
Fixed 108 000
Administration overheads Fixed 20 000
Next profit 11 400

The following information is also supplied to you by the companys financial controller: 1. The above draft budget assumes that the factory will only be working at two-thirds;

2. Sales above maximum capacity are not possible;

3. Planned sales for the draft budget in the year to 31 March are expected to be 25% less than the total of 3 200 VR Headsets sold in the previous financial year.

4. The company operates a just-in-time stock control system, which means it holds no stocks of any kind

5. If more than three thousand VR Headsets are made and sold, the unit cost of material falls by R4 per unit.

6. Sales commission is based on the number of units sold and not on sales turnover; The board is not happy with the profit projected in the draft budget, and the sales director has produced three proposals to try and improve matters: Proposal 1 This proposal involves launching an aggressive marketing campaign: (i) This would involve a single additional fixed cost of R14 000 for advertising;

(ii) There would be a revised commission payment of R18 per unit sold;

(iii) Sales volume would be expected to increase by 10% above the level projected in the draft budget, with no change in the unit selling price.

Proposal 2 This proposal involves a 5% reduction in the unit selling price: (i) This is estimated to bring the sales volume back to the level in the previous financial year.

Proposal 3 This proposal involves a 10% reduction in the unit selling price: (i) Fixed selling overheads would also be reduced by R45 000;

(ii) If proposal 3 is accepted, the sales director believes sales volume will be 3 800 units. REQUIRED: 4.1 Calculate unit variable cost and unit selling price based on the draft budget provided by the financial controller (4 marks)

4.2 For each of the three proposals, calculate the:

(i) Change in profits compared with the draft budget; (17 marks)

(ii) Break-even point in units (3 marks)

4.3 Recommend which proposal, if any, should be accepted on financial grounds. (1 marks)

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