Silicon Ltd manufactures a single product called ATN14. The selling price of which is set at

$136. The standard variable costs per unit of the product are:

Direct material 4 kilos at $7.5 per kilo

Direct labour 5 hours at $11 per hour

Production overhead $2.4 per direct labour hour

Sales overhead $5 per unit

The company expects to manufacture and sell 8,000 units in total during the year 2019.

The fixed overhead costs for the forthcoming year are:

Date Units Cost / unit Sales price / unit

Production 60,000

Administration 35,000

Sales 11,000

Required:

a) Calculate for the year 2019, the break-even point in units (2 marks)

The sales manager has suggested the following option for the year 2020 and has asked for an

evaluation.

Option

Increase the direct material costs by 5%, increase the direct labour cost by 4%, increase production

overhead and sales overhead by 10%, increase fixed production cost by 3%, increase administration

costs by 8% and increase the sales by 10%.

Required:

b) Show by means of a statement, the effect on the budgeted profit of the above option (3

marks)

c) Calculate the selling price that will maintain the companys contribution to sales ratio at the

same level as year 2019 (2 marks)

Cost volume profit analysis is based on certain assumptions that may not always be correct.

e) State TWO assumptions and briefly explain why they may not always be correct. (3 marks)