You received the following financial statement from Bok Traders who manufacture replica rugby jerseys. The managing director, Mr Erasmus, has asked for your assistance to determine whether the marketing manager’s proposal is a viable option in helping to boost the company’s revenue. In the current financial year 40 000 jerseys were sold, which was 60 000 jerseys less than what was sold previously. STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 MARCH 2021 DETAILS R Sales 8 800 000 Cost of Sales (4 500 000) Gross Profit 4 300 000 Other operating income 1 200 000 Gross operating income 5 500 000 Operating expenses (3 400 000) Operating profit 2 100 000 Interest income 195 000 Profit before interest expense 2 295 000 Interest expense (475 000) Profit before tax 1 820 000 The marketing team, through their research, has indicated that if the selling price was reduced by 25%, then unit sales would increase by 60% for the next financial year. Together with the marketing department’s research, the financial manager has provided you with the following forecasted information for the year ending 31 March 2022. • Through negotiation with suppliers and the improved exchange rate, the costs to manufacture each jersey are expected to decrease by 10%. • Other operating income is expected to increase by 5%. • Operating expenses are expected to increase by 12%. • Due to the decline in interest rates, interest income is expected to be three quarters of the amount earned for the year ending 31 March 2021 whilst the interest expense is expected to decline by R 50 000. Mr Erasmus has indicated that the proposal will only be implemented if the forecasted net profit before tax percentage exceeds the industry average of 15%. REQUIRED: Prepare a budgeted statement of comprehensive income using the information above to determine whether the marketing manager’s proposal should be implemented
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
You received the following financial statement from Bok Traders who manufacture replica rugby
jerseys. The managing director, Mr Erasmus, has asked for your assistance to determine whether the
marketing manager’s proposal is a viable option in helping to boost the company’s revenue. In the
current financial year 40 000 jerseys were sold, which was 60 000 jerseys less than what was sold
previously.
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 MARCH 2021
DETAILS R
Sales 8 800 000
Cost of Sales (4 500 000)
Gross Profit 4 300 000
Other operating income 1 200 000
Gross operating income 5 500 000
Operating expenses (3 400 000)
Operating profit 2 100 000
Interest income 195 000
Profit before interest expense 2 295 000
Interest expense (475 000)
Profit before tax 1 820 000
The marketing team, through their research, has indicated that if the selling price was reduced by 25%,
then unit sales would increase by 60% for the next financial year.
Together with the marketing department’s research, the
following
• Through negotiation with suppliers and the improved exchange rate, the costs to manufacture
each jersey are expected to decrease by 10%.
• Other operating income is expected to increase by 5%.
• Operating expenses are expected to increase by 12%.
• Due to the decline in interest rates, interest income is expected to be three quarters of the
amount earned for the year ending 31 March 2021 whilst the interest expense is expected to
decline by R 50 000.
Mr Erasmus has indicated that the proposal will only be implemented if the forecasted net profit
before tax percentage exceeds the industry average of 15%.
REQUIRED:
Prepare a budgeted statement of comprehensive income using the information above to determine
whether the marketing manager’s proposal should be implemented
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