Hernandez Limited produces three models of suitcase: Basic, Deluxe and Excel. The company's profit statements for the year ended 31 December 2014 for each model show the following.

Required

a. Calculate the contribution per unit for each model of suitcase. 

b. Calculate the break-even point in units for each model of suitcase.

c. Advise the directors whether the company should cease production of the loss-making Basic model of suitcase. Justify your decision. 

The directors are considering investing in a large advertising campaign at a cost of $12 000 to promote the Basic model of suitcase. They plan to increase the price of the basic model by 10 percent and are confident that as a result of the advertising, sales of the Basic will increase by 50 percent. All other aspects of the business would be budgeted to remain the same as for the year ended 31 December 2014. 

Required

d. Prepare a marginal cost statement to show the projected profit or loss on the Basic model of suitcase for the year ending 31 December 2015. 

e. Calculate the revised break-even point in units for the Basic model of suitcase.

Transcribed Image Text:

Basic Deluxe Excel Total Sales (units) 3 200 1 400 800 5 400 Sales (revenue) 96 000 63 000 52 000 211 000 Cost of sales Direct materials 38 400 20 200 16 800 75 400 Direct labour 32 800 16 600 7100 56 500 Variable 12 200 8500 5500 26 200 overheads Fixed overheads 18 000 10 000 6 000 34 000 Profit/loss) for the year (5 400) 7700 16 600 18 900