Question 5 (10 Marks)

An extract from the income statement of PoMA Ltd for the previous year is given below:

Rs.

Sales (50,000 units)1,000,000

Direct materials350,000

Direct labor cost (50,000 hours)200,000

Fixed manufacturing overhead240,000

Variable manufacturing overhead50,000

Administration overheads180,000

Selling and distribution overhead120,000

The directors are keen to improve revenue and productivity and are considering various options.You are the management accountant and are requested to compute the following:

a. If salesmen are paid commission of 10% of sales, how many units must be sold to achieve breakeven point.(2 Marks)

b. By how much does profit change (increase or decrease) if the selling price is reduced by 10% resulting in an estimated increase in sales volume (in number of units) by 30%.(2 Marks)

c. By how much does profit change (increase or decrease) if the direct labor rate is increased from Rs.4 to Rs.5 per hour. This increase is expected to increase production and sales by 20% without affecting the hours worked. However, advertising costs will increase by Rs.50,000.(2 Marks)

d. How many units must be sold in order to achieve a target profit margin of 10% on sales (profit/salesx100) assuming that advertising costs will increase by Rs.300,000 and selling price willincrease by 20%(2 Marks)

e. What is the Margin of Safety at the sales volume derived in part d above (express as percentage of sales)(2 Marks)