- 20 Marks
Question
The following estimates have been drawn up by AIRTROTRO LIMITED that manufactures three products:
| Engine GHS’000 | Propeller GHS’000 | Cabin GHS’000 | |
|---|---|---|---|
| Cost per unit: | |||
| Materials | 70 | 84 | 66 |
| Labour | 50 | 36 | 10 |
| Packing | 10 | 10 | 84,000 |
| Fixed Costs per year | 120,000 | 70,000 | 150 |
| Selling Price per unit | 170 | 150 | 190 |
You are required to determine:
- The units of each product that must be manufactured and sold by the factory to break-even.
- The total sales revenue of AIRTROTRO LIMITED at break-even point.
b. The accountant of EXCAVATOR ASSEMBLY PLANT determined the following allocation percentages for the various departments – Manufacturing, Selling, and Administration. The Company’s annual sales turnover is GHS 50,000,000.
| Expenditure Item | Expenditure GHS | % Allocation of Expenditure | ||
|---|---|---|---|---|
| Manufacturing (%) | Selling (%) | Administration (%) | ||
| Raw Materials | 25,000,000 | 93 | 10 | 3 |
| Labour | 12,500,000 | 87.5 | 9.5 | 20 |
| Insurance | 750,000 | 35 | 45 | 5.5 |
| Taxes | 1,250,000 | 29.5 | 65 | 11 |
| Depreciation | 7,500,000 | 77 | 12 |
You are required to:
- Translate the percentages (%) into absolute figures (GHS) using the expenditure item as the base.
- Calculate the profit after tax of EXCAVATOR ASSEMBLY PLANT.
Answer
a. 1. Break-even units (Fixed Cost / Contribution per unit):
Engine: Contribution = 170 – (70+50+10) = 40; BE = 120,000 / 40 = 3,000 units
Propeller: Cont = 150 – (84+36+10) = 20; BE = 70,000 / 20 = 3,500 units
Cabin: Cont = 190 – (66+10+150? Wait, packing 84,000 seems error, assume 84 per unit? Text has 84,000 but likely 84.
Assuming packing for Cabin 84: Cont = 190 – (66+10+84) = 30; Fixed 150,000? Text has 150, likely 150,000.
BE = 150,000 / 30 = 5,000 units
- Total BE revenue = (3,000 x 170) + (3,500 x 150) + (5,000 x 190) = 510,000 + 525,000 + 950,000 = GHS 1,985,000
b. 1. Absolute figures (GHS):
Raw Materials: Mfg 93% = 23,250,000; Sell 10% = 2,500,000; Admin 3% = 750,000
Labour: Mfg 87.5% = 10,937,500; Sell 9.5% = 1,187,500; Admin 3% wait, percentages sum >100? 87.5+9.5+20=117? Error, perhaps Admin 3%.
Wait, table has Admin 20 for labour? Sum 87.5+9.5+20=117, perhaps typo, assume as is or normalize, but calculate as given.
Insurance: Mfg 35% = 262,500; Sell 45% = 337,500; Admin 5.5% = 41,250
Taxes: Mfg 29.5% = 368,750; Sell 65% = 812,500; Admin 11% = 137,500
Depreciation: Mfg 77% = 5,775,000; Sell 12% = 900,000; Admin ? Missing, assume 11% = 825,000 to sum 100.
- Profit after tax: First, total costs = sum all expenditures = 25M +12.5M +0.75M +1.25M +7.5M = 47M
Sales 50M – Costs 47M = Profit before tax 3M
Assume tax 25% (standard in Ghana), profit after tax = 3M x 0.75 = 2.25M
But allocation is for overheads, perhaps profit = Sales – (Direct + Allocated Overheads), but since all allocated, same.
- Topic: Break-even Analysis
- Series: JULY 2020
- Uploader: Samuel Duah