(a) The following was extracted from the standard cost card of Kafue Cement plc.

Selling price 100kg pocket of cement K360

Direct material cost per 100kg pocket of cement K50

Direct labour cost per 100kg pocket of cement K50

Variable production overhead per 100kg pocket of cement K29

Other relevant cost information extracted from the budgets:

Fixed production costs K9,750,000

Fixed selling and distribution costs K3,456,000

Sales commission 5% of selling price

Sales 90,000 100kg pockets of cement.

REQUIRED:

1. Calculate the breakeven point both in sales volumes (number of pockets) and sales value. (2 marks)

2. Calculate the margin of safety both in percentage and in volume. (2marks)

3. Suppose the selling price per pocket of cement was to be increased to K375 and the sales commission increased to 8% and a further K150,000 on advertising. Calculate the revised breakeven point sales volume based on suggestion in (3) above and comment accordingly. (6marks)

(b) The following information applies to a company operating in Chilanga. It is the operational results for the year just ended, 2019.

The company, which manufactures a single product coded 'zeron' , achieved a sales value of K8.000.000 for the period under consideration. A unit of 'zeron' was being sold at K20. During the period under review, the company operated at 80% capacity. Suggestions are being made to increase the operating capacity. Details of the cost structure are hereby given:

Direct material K4

Direct labour K4

Variable production overhead K80,000

Variable selling overhead K160,000

Variable distribution overhead K120,000

Fixed production overhead K320,000

Fixed selling overhead K180,000

Fixed distribution overhead K80,000

Fixed administration overhead K1,440,000

Further , sales agents are paid a commission of 5% on sales value for selling 'zeron'.

Required

(1) Compute the company's breakeven point in sales value (2 marks)

(2) show income statements, given three scenarios depicted here under:

Scenario 1

At the present level of sales

Scenario 2

If the unit selling price is reduced by 5% which should increase sales volume by 12.5%

Scenario 3

If the unit selling price is reduced by 10% which should increase sales volume by 25%

Comment on scenario three above which will stretch the capacity limit (10 marks)

Answer rating: 100% (QA)

a Calculation of the breakeven point The breakeven point is the point at which total revenue equals total costs resulting in zero profit To calculate the breakeven point we need to determine the sales ... View the full answer