Sondela Crafts is a small company that specialises in the manufacture of curios to customer specifications. The company recently opened a specialised unit that is dedicated to the manufacture of a curio piece popularly known as “Ilala”. The unit is staffed by manager and various sales personnel. The unit manager is remunerated on a fixed salary basis and the sales personnel receive a fixed salary plus commission. As part of a review of the first year of operations, the unit manager has provided you with the following information as part of an effort to assess the unit’s financial viability: Selling Price per unit R600 Variable manufacturing cost per unit R390 Facilities rental per annum R1 200 000 Salaries (excluding sales commissions) R4 000 000 The unit manager is unsure of how to deal with selling and administration expenses. She has extracted the following information from the cost ledgers: Cost Units R2 750 000 125 000 R3 500 000 250 000 Ignore taxation for purposes of answering this question. Required: (a) Determine the break-even point in units and in rand value. (b) Management is considering a proposal from the sales force that would see them forego their sales commission for an increase in their salaries. The proposal would see fixed salaries increase by a total sum of R1 620 000. What would be the new break-even point in units under such a scenario? (c) Head office is considering, as an incentive based on the original information, paying the unit manager R6,00 per unit sold in addition to her current fixed salary. Such incentive is conditional upon the unit manager making an annual profit of R500 000 plus R50 profit per unit sold. How many units must be sold under such a scenario? (d) Based on the information in (c) above, calculate the margin of safety (%) and explain its meaning. (e) List five key assumptions underlying cost-volume-profit analysis.
Sondela Crafts is a small company that specialises in the manufacture of curios to customer specifications. The company recently opened a specialised unit that is dedicated to the manufacture of a curio piece popularly known as “Ilala”. The unit is staffed by manager and various sales personnel. The unit manager is remunerated on a fixed salary basis and the sales personnel receive a fixed salary plus commission. As part of a review of the first year of operations, the unit manager has provided you with the following information as part of an effort to assess the unit’s financial viability:
Selling Price per unit R600
Variable manufacturing cost per unit R390
Facilities rental per annum R1 200 000
Salaries (excluding sales commissions) R4 000 000
The unit manager is unsure of how to deal with selling and administration expenses. She has extracted the following information from the cost ledgers:
Cost Units
R2 750 000 125 000
R3 500 000 250 000
Ignore taxation for purposes of answering this question.
Required:
(a) Determine the break-even point in units and in rand value.
(b) Management is considering a proposal from the sales force that would see them forego their sales commission for an increase in their salaries. The proposal would see fixed salaries increase by a total sum of R1 620 000. What would be the new break-even point in units under such a scenario?
(c) Head office is considering, as an incentive based on the original information, paying the unit manager R6,00 per unit sold in addition to her current fixed salary. Such incentive is conditional upon the unit manager making an annual profit of R500 000 plus R50 profit per unit sold. How many units must be sold under such a scenario?
(d) Based on the information in (c) above, calculate the margin of safety (%) and explain its meaning.
(e) List five key assumptions underlying cost-volume-profit analysis.
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