You are the chief financial analyst of Hercules Manufacturing Limited. The company manufactures bowls and has been planning to aggressively expand its sales into the Middle Eastern markets. You have been tasked to analyse its reports using CVP and provide explanations to the Director, Tierra Muller. The operating statement relating to the month ended September 30, 2019 of Hercules Manufacturing Limited is as follows: $’000 $’000 Sales (22,000 units) 3,300 Direct materials 726 Direct labour 374 Production overheads 798 Total 1,898 Gross profit 1,402 Selling overheads 1,042 Net profit 360 The variable production overheads were $9 per unit while the variable selling overheads were $11 per unit. Required: a) The company has a capacity of 30,000 units per year. Management is not happy with the financial performance for the last year, and one course of action for the coming year were proposed in the recent management meeting: • The sales manager believed that unit volume would increase by 30% with the incurrence of $200,000 on advertising. Prepare a CVP income statement for the alternative (showing columns for totals only). Would you recommend this alternative and why? b) The company has a target net income of $750,000. Assume additional advertising costs will be incurred, what is the required sales in dollars for the company to meet its target?
Question
You are the chief financial analyst of Hercules Manufacturing Limited. The company manufactures
bowls and has been planning to aggressively expand its sales into the Middle Eastern markets. You
have been tasked to analyse its reports using CVP and provide explanations to the Director, Tierra
Muller.
The operating statement relating to the month ended September 30, 2019 of Hercules Manufacturing
Limited is as follows:
$’000 $’000
Sales (22,000 units) 3,300
Direct materials 726
Direct labour 374
Production
Total 1,898
Gross profit 1,402
Selling overheads 1,042
Net profit 360
The variable production overheads were $9 per unit while the variable selling overheads were $11 per
unit.
Required:
a) The company has a capacity of 30,000 units per year. Management is not happy with the financial
performance for the last year, and one course of action for the coming year were proposed in the
recent management meeting:
• The sales manager believed that unit volume would increase by 30% with the
incurrence of $200,000 on advertising.
Prepare a CVP income statement for the alternative (showing columns for totals only). Would you
recommend this alternative and why?
b) The company has a target net income of $750,000. Assume additional advertising costs will be
incurred, what is the required sales in dollars for the company to meet its target?
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