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Doyle Ltd produces a single product - Leaving Cert Accounting - Question 8 - 2008
Question 8
Doyle Ltd produces a single product. The company’s profit and loss account for the year ended 31/12/2007, during which 14,000 units were produced and sold, was as fo... show full transcript
Worked Solution & Example Answer:Doyle Ltd produces a single product - Leaving Cert Accounting - Question 8 - 2008
Step 1
The company’s break-even point and margin of safety.
Answer
To calculate the break-even point, we find the total fixed costs and contribution per unit.
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Variable Costs =
- Direct materials: €120,000
- Direct labour: €140,000
- Factory overhead: €80,000 Total Variable Costs = €120,000 + €140,000 + €80,000 = €340,000
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Contribution (Sales - Variable Costs) = €560,000 - €340,000 = €220,000
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Total Fixed Costs = Administration overhead (fixed portion) + €62,500 = €122,500
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Contribution per unit = Total Contribution / Units sold = €220,000 / 14,000 = €15.71
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Break-even point (in units) = Total Fixed Cost / Contribution per unit = €122,500 / €15.71 ≈ 7,778 units.
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Margin of Safety = Actual Sales - Break-even Sales = 14,000 - 7,778 = 6,222 units.
Step 2
The profit the company would make in 2008 if it reduced the selling price by 5%, increased advertising by €10,000 and increased sales to 20,000 units.
Answer
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New Selling Price = Original Price - 5% = €40 - €2 = €38.
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New Sales = 20,000 units x €38 = €760,000.
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Variable Costs remain unchanged for the increased sales = 20,000 units x €24.25 = €485,000.
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Contribution = Sales - Variable Costs = €760,000 - €485,000 = €275,000.
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Total Fixed Costs remain the same = €122,500 + €10,000 (extra advertising) = €132,500.
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Net Profit = Contribution - Fixed Costs = €275,000 - €132,500 = €142,500.
Step 3
The number of units that must be sold at €36 per unit to provide a profit of 20% of the sales revenue received from these same units.
Answer
Let N = number of units to be sold.
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Desired Profit = 20% of Revenue = 0.2 × (N × €36).
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Revenue = Selling Price × Units Sold = €36N.
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Total Variable Cost = €24.25N.
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Contribution = Revenue - Variable Costs = €36N - €24.25N = €11.75N.
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For a profit of 20% profit from sales:
N = rac{122,500 + 0.2(36N)}{11.75}
Solving this gives approximately 26,924 units.
Step 4
The profit the company would make if a commission of 5% of sales is given to sales personnel, and increased sales to 19,000 units at €42 per unit.
Answer
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New Sales = 19,000 units × €42 = €798,000.
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Variable Costs (including 5% commission) = 19,000 × €24.25 + 5% × €798,000.
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Contribution = Sales - Total Variable Costs.
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Fixed Costs remain at €122,500.
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Profit = Contribution - Fixed Costs.
Step 5
For what purpose is the Contribution Sales Ratio regularly used? When is the use of this ratio essential?
Answer
The Contribution Sales Ratio indicates the proportion of sales revenue that contributes to fixed costs and profit. It is essential for decision-making regarding pricing, product lines, and assessing the impact of fixed and variable costs on profitability. This ratio helps in determining the break-even point and in forecasting the effects of changes in sales volume.
Step 6
Separate overheads into fixed and variable elements.
Answer
To separate the overheads, analyze the given data:
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For Production Overheads:
- High (100%): €114,000
- Low (0%): €66,000
- Fixed cost = €66,000.
- Variable cost per unit = €6.
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For Other Overheads:
- High (100%): €90,000
- Low (0%): €42,000
- Fixed cost = €42,000.
- Variable cost per unit = €5.25.
Step 7
Prepare the flexible budget for 85% Activity Level using Marginal costing.
Answer
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Calculate sales for 85% activity level:
- Sales = 85% × €785,000 = €667,250.
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Calculate variable costs:
- Total variable cost = €631,750.
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Contribution = Sales - Variable Costs = €667,250 - €631,750 = €35,500.
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Profit = 15% of Sales = 15% × €785,000 = €117,750.
Step 8