The financial manager of Orbit Limited provided the following forecasts for 2023: Sales are estimated at 8 000 units with a selling price of R1 800 each. The manufacturing costs include direct materials of R460 per unit, direct labour of R315 per unit, variable overheads of R170 per unit and fixed overheads of R880 000. Fixed selling and administration costs are estimated at R2 000 000 and the variable selling costs are estimated to be 7.5% of sales. The directors are contemplating diversification in 2024 by entering the passenger transport market. This could be achieved through the purchase of a fleet of midi buses that are expected to cost R9 500 000. An additional R500 000 will be spent on import duties. The cost of operating the buses each year is expected to be R4 100 000 and the annual revenues from transporting the passengers are estimated at R7 000 000. The buses are expected to have a total salvage value of R1 000 000 and the estimated useful life of the buses is five years. The company’s cost of capital is expected to reduce to 15%. Depreciation is calculated using the straight-line method. Refer to the forecasts made by the financial manager for 2023 and calculate the following independently. As far as possible, use the contribution margin format of the income statement to present your answers. 3.1. Break-even quantity. 3.2 The sales value required to make an operating profit of R2 016 000, by using the contribution margin ratio. 3.3 The percentage change in the operating profit (expressed to two decimal places), if the selling price and fixed costs increase by 10% 3.4 The total Contribution Margin and Operating Profit/Loss if the sales volume is 10% below expectation. 3.5 The selling price per unit (expressed in rands and cents) that will enable the company to break even.
The
Sales are estimated at 8 000 units with a selling price of R1 800 each. The
materials of R460 per unit, direct labour of R315 per unit, variable overheads of R170 per unit and fixed
overheads of R880 000. Fixed selling and administration costs are estimated at R2 000 000 and the variable
selling costs are estimated to be 7.5% of sales.
The directors are contemplating diversification in 2024 by entering the passenger transport market. This could
be achieved through the purchase of a fleet of midi buses that are expected to cost R9 500 000. An additional
R500 000 will be spent on import duties. The cost of operating the buses each year is expected to be R4
100 000 and the annual revenues from transporting the passengers are estimated at R7 000 000. The buses
are expected to have a total salvage value of R1 000 000 and the estimated useful life of the buses is five
years. The company’s cost of capital is expected to reduce to 15%.
straight-line method.
Refer to the forecasts made by the financial manager for 2023 and calculate the following independently. As
far as possible, use the contribution margin format of the income statement to present your answers.
3.1. Break-even quantity.
3.2 The sales value required to make an operating profit of R2 016 000, by using the
contribution margin ratio.
3.3 The percentage change in the operating profit (expressed to two decimal places), if the
selling price and fixed costs increase by 10%
3.4 The total Contribution Margin and Operating
expectation.
3.5 The selling price per unit (expressed in rands and cents) that will enable the company to
break even.
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