Chew Company Ltd manufactures and sells a single product. The following information regarding the companys operations for
Question:
Profit and Loss account for the year ended 30 Sept. 2001 | ||
Sh ‘000’ | Sh ‘000’ | |
Sales | 30,000 | |
Less: Production costs: | ||
Direct material | 6,500 | |
Direct labour | 5,400 | |
Production overhead (variable) | 7,000 | |
PRIME COST | 18,900 | |
11,100 | ||
Other expenses: | ||
Selling - variable | 2,600 | |
- Fixed | 1,997 | |
Administration | 2,100 | 6,697 |
Net profit | 4,403 ====== |
The following changes are expected to occur during the year ended 30 September 2002.
1. | Selling price will be adjusted downwards by 5% in order to attract more customers. |
2. | Material prices will rise by 2% due to inflation. |
3 | There will be a reduction in labour cost of 4%. |
4 | Production overhead will increase by 3%. |
5 | Increase in the efficiency of sales person will reduce direct selling cost by 5%. |
All other factors are expected to remain constant.
Required:
(i) Break-even point in sales value. [4 marks]
(ii) The margin of safety in sales value. [2 marks]
(iii) The sales value at which profit of Sh.4.5 million will be achieved. [2 marks]
(iv) A summary operating statement that show the net profit of Sh.4.5 million
in (iii) above.