Problem
Teras Berhad has collected the following information after its first year of sales. Top management has asked you to prepare a Cost-Volume-Profit (CVP) analysis so they can plan for the coming year.The company has projected that unit sales will increase by 20% next year if a new plan is implemented as follows: Purchase of equipment that would reduce its direct labor costs by RM240,000. This would change its manufacturing overhead cost to New Plan 30% variable and 70% fixed (assume total manufacturing overhead cost is same as above). The company is also considering switching to a pure commission basis for its staff. This would change selling expenses to 80% variable and 20% fixed (assume total selling expenses is as above)
Required:
a) Compute the contribution margin and fixed costs for the current year.
b) Compute the break-even point in units and sales in Ringgit Malaysia for the current year.
c) The company has a target net income of RM620,000. Compute the required sales in Ringgit Malaysia for the company to meet its target.
d) If company is considering a new plan for the projected year; Compute the contribution margin ratio. Compute the breakeven point in unit and sales in Ringgit Malaysia.
e) Comment on the effect of management's proposed plan on the break-even point.