Parippu Ltd is a luxury restaurant located in Colombo that makes a wide range of traditional cuisine.
Question:
Parippu Ltd is a luxury restaurant located in Colombo that makes a wide range of traditional cuisine. All meals sell for $14.95 each and are similar in terms of the labour, material and direct cost involved in their production. The average unit variable cost per meal is as follows:
$
Direct materials 3.00
Direct labour 4.00
Variable overheads 1.00
The company’s fixed costs are $15,000 per month and sales units are 3,000 meals per month.
The company is considering investing in new equipment, which would reduce the direct labour costs and variable overheads by 25% and increase the fixed costs by 20%. In conjunction with the new investment, the company plans to reduce the selling price per meal to $13.95, which would result in an expected increase in sales volume to 4,000 meals per month.
Required:
(a) Calculate the company’s current break-even point in units and margin of safety in percentage. [6 Marks]
(b) Calculate the annual estimated profit based on the estimated demand level of 3,000 meals per month. [4 Marks]
(c) Calculate the new break-even point in units and margin of safety in percentage if the business goes ahead with the purchase of the new equipment. [6 Marks]
(d) Discuss the figures you have calculated above in terms of the decision and the riskiness of the proposal. [8 Marks]
(e) Discuss the assumptions of breakeven analysis and the usefulness of such a technique in a modern business. [6 marks]
Expert Answer:
The detailed answer for the above question is provided below a Current Breakeven Point in Units Fixed CostsContribution Margin Fixed Costs 15000 Contr... View the full answer
