Question

Seiko Manufacturers is expected to commence business on 01 July 2020, making smart watches. The budgeted figures for July 2020 (Question 1) and August 2020 (Question 2) are provided below. You are expected to assist Seiko Manufacturers in its planning phase by undertaking CVP analysis and preparing an income statement using absorption costing

Information The following information was extracted from the budget of Seiko Manufacturers for the month ended 31 July 2020.

Estimated production and sales - 3 000 units

Selling price per watch-R900

Variable manufacturing costs per watch:

• Direct materials - R270
• Direct labour - R180
• Overheads-R90

Fixed manufacturing overheads - R282 000

Marketing and administrative costs:

• Fixed costs- R150 000
• Variable costs- 10% of sales

Required Answer each of the following questions independently from the information given above:

1.1 Calculate the break-even quantity. (3 marks)

1.2 Calculate the target sales value using the marginal income ratio, if a profit of R600 000 is desired. (3 marks)

1.3 The sales manager made the following proposal to increase profitability: Decrease the selling price by R40 per unit and increase advertising expense by R24 000 with the expectation that sales volume will increase by 10%. Should the sales manager's proposal be accepted? Motivate your answer with the relevant calculations. (4 marks)