Escolar Documentos
Profissional Documentos
Cultura Documentos
Activity 1-Acceptance of special order D Ltd manufacture and market cola they sell for 20 p per can. Current output is 400,000 cans per month which represents 80 % of capacity. They have the opportunity to utilise their surplus capacity by selling their product at 13 p per can to a supermarket chain which sell it at their own label product. Total cost for the last month were 56,000 of which 16,000 were fixed costs. This represented a total cost of 14 p per can. Based on the above data should D Ltd accept the supermarket order? 8
A special machine is used to manufacture the three products and there are only 15,000 machine hours available. Product X uses 20 machine hours per unit. Product Y uses 5 machine hours per unit. Product Z uses 2 machine hours per unit. 10 Which product should be manufactured first?
must be confident that supplier can meet delivery times and quantities Quantity of the product must also be considered
11
13
6,000
14,000
38,000
12,000
33,000
(8,000)
77,000
18,000
14
15
Pricing decisions
The price at which a good may be sold is usually decided by a number of factors
The need to make a profit Market demand A requirement to increase market share for a product Maximum utilization of resources
Required: Calculate the profit or loss from the sale f (i) 6,000 (ii) 8,000 (iii) 11,000 units and recommend which option should be adopted
18
Relevant information: Future costs and revenues- Past cost and revenues are only useful in so far as they provide a guide to the future. Costs already spent, known as sunk costs,a re irrelevant for decision making
Differential costs and revenues- Only those costs and revenues which alter a a result of a decision are relevant. Where factors are common to all the alternatives being considered, they can be ignored.
19
Situation when dropping product X:Rs Contribution product Y 24,667 Contribution product Z 22,333 Total Contribution 47,000 Less fixed cost 36,000 Net profit 11,000
Example
A company is able to produce four products and is planning its production mix for the next period. Estimated sales and production data follow:Product w x y z SP per unit 29 36 61 51 Labour (@5/hr) 15 10 35 25 Materials(@1/kg) 6 18 10 12 Contribution 8 8 16 14 Product Resources/units Labour (Hours) Materials (Kg) Maximum Demand w x y z
Based on the above data, which is the most appropriate product mix under the following assumptions:If labour hours are limited to 50,000 in a period If material is limited to 110,000 kgs in a period
23
Break-even analysis
Term given to the study of the interrelationships between costs, volume and profit at various levels of activity. The term break-even analysis is commonly used, but it is somewhat misleading as it implies that the only concern is with that level of activity which produces neither profit nor a loss-the break-even point. However the behaviour of costs and profits at other cost levels is usually of much greater significance. Because of this an alternative term, cost-volume-profit analysis (C-V-P analysis) is used.
24
Sales
Variable Costs
= =
Contribution Margin
$500,000
$300,000
$200,000
26
Many managerial decisions require an analysis of the behavior of costs and profits as a function of the expected volume of sales. In the short run, the costs and prices of a firm's products will, in general, be given. The principal uncertainty, therefore, is not the cost or price of a product, but the quantity that will be sold. Thus, the short-run profitability of a product line will be most sensitive to the volume of sales. Cost-volume-profit (C-V-P) analysis highlights the effect of changes in volume on profitability.
27
28
In order to forecast profits accurately, it is essential to ascertain the relationship between cost and profit on one hand and volume on the other. Cost-volume-profit analysis is helpful in setting up flexible budget which indicates cost at various levels of activities. Cost-volume-profit analysis assist in evaluating performance for the purpose of control. Such analysis may assist management in formulating pricing policies by projecting the effect of different price structures on cost and profit.
29
1. Changes in activity are the only factors that affect costs. 2. There is linear relationship between revenue and cost. 3. The unit selling price, unit variable costs and fixed costs are constant. 4. The analysis either covers a single product or assumes that the sales mix ( ratio of each product to total sales) sold in case of multiple products will remain constant as the level of total units sold changes. 5. All revenue and cost can be added and compared without taking into account the time value of money. 6. Costs can be classified accurately as either fixed or variable.
30
Activity
A company makes a single product with a sales price of Rs 10 and a marginal cost of Rs 6. Fixed costs are Rs 60,000. Calculate:Number of units to break even Sales at break-even point C/S ratio What number of units will need to be sold to achieve a profit of Rs 20,000 per annum What level of sales will achieve a profit of Rs 20,000 per annum If the taxation rate is 40 % how many units will need to be sold to make a profit after tax of Rs 20,000 Because of increasing costs the marginal cost is expected to rise to Rs 6.50 per unit and fixed costs to Rs 70,000 p.a. If the selling price cannot be increased what will be the 32 number of units required to maintain a profit of Rs 20,000 p.a? Ignore taxation.
1. 2. 3. 4. 5. 6. 7.
33
Break-even Sales
The size of margin of safety is an extremely valuable guide to the strength of a business. If it is large, there can be substantial falling of sales and yet a profit can be made. On the other hand, if margin is small, any loss of sales may be a serious matter.
34
$250,000
$750,000
33%
35
Activity
1. 2. 3. 4. 5. 6. 7.
A company producing a single article sells it at $ 10 each. The marginal cost of production is $ 6 each and fixed cost is $ 400 per annum. You are required to calculate the following: Profits for annual sales of 1 unit, 50 units, 100 units and 400 units C/S ratio Breakeven sales Sales to earn a profit of $. 500 Profit at sales of $. 3,000 New breakeven point if sales price is reduced by 10% Margin of safety at sales of 400 units
36
250000 200000 150000 100000 50000 0 0 100000 200000 300000 400000 500000
Output (Litres)
39
Draw a break even chart by plotting the following: The Total cost line The marginal cost line The total revenue line
40
Activity
A manufacturer incurred the following costs in a period for his sole product:Rs Labour (25 % variable) 8,000 Materials (100 % variable) 12,000 Selling costs (10 % variable) 2,000 Other costs (fixed) 7,000 Total costs 29,000 A normal periods sales are 500 units at Rs 70 each, but up to 650 units could be made in a period. Various alternatives are being considered:Reduce the price to Rs 63 each and sell all that could be made Increase the price to Rs 80 each at which price sales would be 400 units Keep the present plan What is the most profitable pan? What are the C/S ratio? What is the break-even point for each alternative. 42
i. ii. iii.
Limitations
Break-even analysis is only a supply side (ie.: costs only) analysis, as it tells you nothing about what sales are actually likely to be for the product at these various prices.