Smith manufactures a single product that it presently sells for Rs 10•00 per unit. The given estimates are available for the next period:
Sales 6,000 units
Variable costs Rs 6.00 per unit
Fixed costs Rs 15,000
Based on the above, the break-even point for the period has been computed as 3,750 units.
If the selling price is raised to Rs 12.00 per unit, sales are estimated to drop to 4,500 units in the period, with no change in unit variable costs or total fixed costs.
Required:
a) If the selling price is raised to Rs 12.00 per unit for the next period:
• Compute, in units, the break-even point and the margin of safety.
• Describe why the estimated break-even point and margin of safety would both decrease.
b) If the selling price remains at Rs 10.00 per unit, compute the sales volume (units) which would be needed to accomplish a profit of Rs 12,000 in the period.
Question 2: A company manufactures and sells a single product. Budgeted costs for a period are below:
Rs per unit Rs for the period
Direct materials Rs 5.60
Direct labor Rs 4.20
Variable production overhead Rs 0.70
Variable administration overhead Rs 0.50
Fixed production overhead 78,000
Fixed administration overhead 42,000
If the absorption costing is used, the predetermined fixed production overhead absorption rate will be Rs 6.50 per unit based on budgeted production of 12,000 units.
Throughout the period 11,800 units of the product were manufactured. 12,300 units were sold at an average price of Rs 24 per unit. The actual costs in the period were as budgeted.
Required:
a) By using marginal costing, make a profit statement to exhibit the actual results for the period.
b) Compute and describe, the difference in profit for the period if absorption costing is used and why the profit figures be different (show workings clearly).