Lobels Limited a manufacturing company has presented you with the following income statement: Income statement for the year ended 30 April 2020: R Sales (90 000 units) 450 000 Less: Cost of sales (317 700) Direct material 79 200 Direct labour 90 000 Manufacturing overhead - Variable 34 200 - Fixed 114 300 Gross profit 132 300 Less: Operating expenses (138 600) Selling expenses - Variable (sales commission) 22 500 - Advertising (fixed) 27 000 - Salaries (fixed) 36 900 Administrative expenses (fixed) 52 200 Net loss 6 300 Variable manufacturing overheads vary with the units manufactured. Variable selling expenses consist of sales commission, which is determined as a percentage of turnover. There was no inventory at the beginning or end of the year. The company has sufficient capacity to manufacture one hundred and fifty thousand units per annum. In an attempt to improve the company’s profitability certain proposals have been formulated, the facts of which are given below. Each of the proposals is to be considered independent of each other. First proposal The sales volume can be increased by 50% by changing the design of the packaging format. The selling price will in this case simultaneously be increased by 8% per unit. The current packaging cost amounts to R0.09 per unit and is completely variable. The variable packaging cost relating to the new format will amount to R0.43 per unit. A single amount of R1 200 will be incurred in redesigning the packaging format. This amount must be recovered in full in the first year during which the product is sold in the new format. Second proposal It has been established that sales can be influenced by changing the amount spent on advertising. Determine the number of units that will have to be sold during the first year in the new format in order to break even and calculate the margin of safety ratio if the first proposal is accepted and implemented. Calculate the amount by which advertising expenses can be increased in order to increase the sales volume from R90 000 units to 130 000 units, and to earn simultaneously a profit of 6% based on turnover
Lobels Limited
Lobels Limited a manufacturing company has presented you with the following income statement:
Income statement for the year ended 30 April 2020:
R
Sales (90 000 units) 450 000
Less: Cost of sales (317 700)
Direct material 79 200
Direct labour 90 000
Manufacturing overhead
- Variable 34 200
- Fixed 114 300
Gross profit 132 300
Less: Operating expenses (138 600)
Selling expenses
- Variable (sales commission) 22 500
- Advertising (fixed) 27 000
- Salaries (fixed) 36 900
Administrative expenses (fixed) 52 200
Net loss 6 300
Variable manufacturing overheads vary with the units manufactured. Variable selling expenses consist of sales commission, which is determined as a percentage of turnover. There was no inventory at the beginning or end of the year.
The company has sufficient capacity to manufacture one hundred and fifty thousand units per annum. In an attempt to improve the company’s profitability certain proposals have been formulated, the facts of which are given below. Each of the proposals is to be considered independent of each other.
First proposal
The sales volume can be increased by 50% by changing the design of the packaging format. The selling price will in this case simultaneously be increased by 8% per unit. The current packaging cost amounts to R0.09 per unit and is completely variable. The variable packaging cost relating to the new format will amount to R0.43 per unit.
A single amount of R1 200 will be incurred in redesigning the packaging format. This amount must be recovered in full in the first year during which the product is sold in the new format.
Second proposal
It has been established that sales can be influenced by changing the amount spent on advertising.
Determine the number of units that will have to be sold during the first year in the new format in order to break even and calculate the margin of safety ratio if the first proposal is accepted and implemented.
Calculate the amount by which advertising expenses can be increased in order to increase the sales volume from R90 000 units to 130 000 units, and to earn simultaneously a profit of 6% based on turnover
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