Y2L Ltd is a new company which has been set up to specialise in manufacturing a...

  
 
 

 
 

Transcribed Image Text:

Y2L Ltd is a new company which has been set up to specialise in manufacturing a new type of tent for sale to youth groups using a recently developed synthetic material. The forecast annual sales for 2022 are 2,560 tents. Production levels would be the same as the sales estimates. The Sales Manager predicts that the tents can be sold at a price of $318 each. Variable production costs, together with the overhead costs, are set out below: Per tent ($) Variable costs of production: Synthetic material ($2 per sq. metre) Poles and pegs 20 6 Labour ($8 per hour) Overheads: Rent of factory premises Lease of machine Other overheads 40 $160,000 per year $136,000 per year $87,000 per year plus $2 per tent Required: Calculate: (a) (i) Break-even point (in units and sales dollars); (ii) Margin of safety, MOS (in units); (iii) Operating profit based on forecast yearly sales for 2022. (Show all workings clearly.) (8 m (b) The Sales Manager makes the following proposal: He forecasts that annual sales would increase by 10% if Y2L Ltd incurs an additional annual advertising expenditure of $45,490. With the increase in marketing effort, he forecasts that the selling price could be increased to $329 per tent. Y2L Ltd is planning to source for cheaper raw materials from another supplier and expects material cost will reduce to $1.50 per square metre. To meet the increase in production from the additional sales and to further improve the profitability, Y2L Ltd plans to increase the direct wage rate from $8 to $12 per hour as part of a productive deal that could cut the labour hours needed from 5 hours to 3 hours per tent for all units to be produced and sold. The Sales Manager is confident that the company is able to achieve the 10% increase in sales forecast for 2022 if his proposal is implemented. Assume all other costs remain unchanged. Required: (i) Re-compute the requirements as in part (a)(i) to (iii). (7 marks) (ii) Briefly explain the significance of the break-even point and margin of safety with reference to Y2L Ltd. Analyse and comment on your answers by comparing the calculations in parts (a)(i) to (iii) and (b)(i). Based on your analysis, should Y2L Ltd accept the Sales Manager's proposal? (7 marks) Y2L Ltd is a new company which has been set up to specialise in manufacturing a new type of tent for sale to youth groups using a recently developed synthetic material. The forecast annual sales for 2022 are 2,560 tents. Production levels would be the same as the sales estimates. The Sales Manager predicts that the tents can be sold at a price of $318 each. Variable production costs, together with the overhead costs, are set out below: Per tent ($) Variable costs of production: Synthetic material ($2 per sq. metre) Poles and pegs 20 6 Labour ($8 per hour) Overheads: Rent of factory premises Lease of machine Other overheads 40 $160,000 per year $136,000 per year $87,000 per year plus $2 per tent Required: Calculate: (a) (i) Break-even point (in units and sales dollars); (ii) Margin of safety, MOS (in units); (iii) Operating profit based on forecast yearly sales for 2022. (Show all workings clearly.) (8 m (b) The Sales Manager makes the following proposal: He forecasts that annual sales would increase by 10% if Y2L Ltd incurs an additional annual advertising expenditure of $45,490. With the increase in marketing effort, he forecasts that the selling price could be increased to $329 per tent. Y2L Ltd is planning to source for cheaper raw materials from another supplier and expects material cost will reduce to $1.50 per square metre. To meet the increase in production from the additional sales and to further improve the profitability, Y2L Ltd plans to increase the direct wage rate from $8 to $12 per hour as part of a productive deal that could cut the labour hours needed from 5 hours to 3 hours per tent for all units to be produced and sold. The Sales Manager is confident that the company is able to achieve the 10% increase in sales forecast for 2022 if his proposal is implemented. Assume all other costs remain unchanged. Required: (i) Re-compute the requirements as in part (a)(i) to (iii). (7 marks) (ii) Briefly explain the significance of the break-even point and margin of safety with reference to Y2L Ltd. Analyse and comment on your answers by comparing the calculations in parts (a)(i) to (iii) and (b)(i). Based on your analysis, should Y2L Ltd accept the Sales Manager's proposal? (7 marks)

Answer rating: 100% (QA)

a i Breakeven point Total fixed costs Contribution per unit Breakeven point 160000 136000 87000 3830... View the full answer