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John Moffat.
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- November 8, 2016 at 7:53 am #348001
Dear Tutor,
Good morning. I have these two challenging questions in relation to the CVP analysis and determination of selling price as seen below. Your support is much appreciated. Best regards. JMA.Question One (Cost-volume profit analysis):
Given below is the revenue and cost data extracted from JM Textiles Ltd which manufactures and sells school uniforms to various schools in the country. The information is provided on the basis of a pair of uniform for the year, 2016. The figures are in US ($)
Selling price per pair of uniform 80
Direct material cost per pair 26
Direct labour 15
Production overheads
Variable 4
Fixed 16
Selling & administrative Overheads
Variable 3
Fixed 3 (67)
Profit 13The fixed production overhead and selling and administration over heads per unit are based on estimated output and sales of 4,000 pairs in 2016.
The company`s management is unhappy that the estimated sales for 2016 will fail to achieve the target profit of $100,000, and the following options are being considered in an attempt to improve the position.
1. The sales manager has suggested that, if the selling price per pair of uniform were reduced to $76, sales would rise to 6,500 pairs. This option would incur an extra fixed advertising cost of $50,000
2. The option proposed by the production manager involves purchase of a new machine. This will reduce the variable production overhead cost per pair of uniform to nil but will incur an additional fixed production overhead of $23,000 per year. Estimated sales will remain at 4,000 pairs of uniform.
3. A third alternative has been put forward by the managing director. Changing production methods and direct materials will improve product quality, allowing JM Textiles Company Ltd to raise the selling price to $90 per pair. Improved quality should allow estimated sales in 2016 to be increased to 5,000 pairs of uniform, whilst direct material cost per pair will rise to $28.Required:
(a) Calculate JM Textiles Ltd breakeven point in pairs and in $`s
(b) The number of pairs the company must sell in order to earn a target profit of $100,000
(c) From the existing data in the given three options above, determine JM Textiles Ltd expected profits
(d) “Decision making is not concerned solely with costs and revenues”. Give some examples of non-financial considerations that may be taken into account when making various types of decisions.Question Two (Calculating selling price):
(a) Fiore Company manufactures office equipment for sale through a network of retail outlets. Tim Lucas, the vice president of marketing, proposed that Fiore introduce two new products, an electric stapler and an electric pencil sharpe. Lucas asked the accounting department to develop preliminary selling prices for both new products. The company standard policy specifies that it uses all variable data in making its pricing recommendations. The results are shown below;
Particulars Electric stapler Electric pencil sharpe
Estimated annual demand 12,000 10,000
Estimated unit manufacturing cost
Variable $3.5 $5.75
Fixed $6.5 $6.25
Estimated unit selling & administrative costs
Variable $2.4 $2.4
Fixed $1.6 $1.6
Assets employed in manufacturing $180,000 $225,000Fiore plans to use an average of $2,400,000 in assets to support its operations in the current, before consideration of either new product. The budgeted income statement for the year shows profit before tax of $480,000 which represents Fiore`s planned goal for the year with respect to cost and return on capital employed.
Required;
a) Calculate the selling price for new products using the return on capital employed method. Assume Fiore wants to achieve a target return on investment based on its budgeted income statement.
In your own opinion, give the justification on whether the return on capital employed computed based on the budgeted income statement and planned assets would be a best measure for selling price benchmark.November 8, 2016 at 8:28 am #348013We do not provide full answers to full questions like this!
You must have answers in the same book in which you found the questions, and you should ask about whatever in the answer is not clear and then I will try and help.
(If you do not have answers then you are wasting your time – you should be using a Revision Kit from one of the ACCA approved publishers – they have answers and explanations to all their questions.)If you have been given these questions as homework then we certainly do not do your homework for you.
You should watch our free lectures – they are a complete course for Paper F5 and cover everything needed to be able to pass the exam well. - AuthorPosts
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