As part of its corporate social responsibility commitments, Libra Ltd decided to assist budding entrepreneurs of a rural community by providing them with financial assistance and training to set up a small business entity by using their creative talents with beads. The business was named Beads4us.
Beads4us uses beads to make skirts. The fixed costs of operating the workshop and a small office were estimated at R96 000 a month. Each skirt requires beads and other materials that cost R92. Each skirt takes two hours to make, and the budding entrepreneurs who make the skirts would receive R30 an hour. The skirts would be sold to retail outlets for R280 each. Beads4us will spend R4 000 per month on advertising. They expect to sell 2 000 skirts per month and the salespersons, who work on commission basis only, will be given a commission of 10% of the selling price.

1. Calculate the number of skirts that Beads4us must sell to break even each month.
2. Calculate the selling price per unit that will enable Beads4us to break even.
3. Calculate the total Contribution Margin and Operating Profit/Loss, if the selling price drops by R30 per skirt.
4. Beads4us is considering paying the salespersons a monthly salary instead of a sales commission. How much can it afford to pay in salaries and achieve an operating profit of R50 000 per month.
5. Suppose Beads4us has the opportunity to rent machines to reduce work time. Doing so would increase the total fixed costs of operating the workshop by R12 000 per month. Using the machines will reduce the labour time to 1.5 hours for each skirt. Those who make the skirts will still be paid R30 per hour and material costs remains unchanged. Will renting the machines be more profitable? Show the relevant calculations.

Answer rating: 100% (QA)

1 Breakeven point Total Fixed CostsContribution Margin per Unit Total Fixed Costs R96 000 Materials ... View the full answer