The Asian Division of Worldwide Reference Corporation produces a pocket dictionary containing popular phases in six Asian languages. Last year, the company sold 100,000 units of dictionary at RM20 per unit. Given below the cost incurred with regard to the dictionary in last year. Costs: Variable (RM) Fixed (RM) Direct material 600,000 - Direct labour 400,000 - Production overhead 300,000 200,000 Selling and administrative 100,000 220,000 The company expects the same costs as last year will incur for the current year. Required: a. Compute the company’s break-even point in units and sales value. b. Compute the company’s margin of safety in units and sales value. c. Compute the operating income for last year of Asian Division.
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
The Asian Division of Worldwide Reference Corporation produces a pocket dictionary containing popular phases in six Asian languages. Last year, the company sold 100,000 units of dictionary at RM20 per unit. Given below the cost incurred with regard to the dictionary in last year.
Costs: Variable (RM) Fixed (RM)
Direct material 600,000 -
Direct labour 400,000 -
Production
Selling and administrative 100,000 220,000
The company expects the same costs as last year will incur for the current year.
Required:
a. Compute the company’s break-even point in units and sales value.
b. Compute the company’s margin of safety in units and sales value.
c. Compute the operating income for last year of Asian Division.
d. If the company’s targeted operating income is RM360,000 for this year, how many units must be sold to reach the targeted operating income?
e. In order to increase sales this year, the company is considering to pay the sales person’s commission of RM2.50 per unit of dictionary sold. If this additional cost is made, what will be the new break-even point in unit and sales value?
f. The sales manager is convinced that a 10% reduction in the selling price, combined with a RM30,000 increase in advertising, would cause annual sales in units to increase by one third (1/3).
i. Calculate the new break-even point (in units) and net operating income.
ii. Would you recommend that the company do as the sales manager suggests?
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