Hoi Poloi plc makes 3 types of filing cabinet,four- drawer ,three drawer and two drawer

Hoi Poloi plc makes 3 types of filing cabinet,four- drawer, three drawer and two drawer.
The business uses general purpose machines which are equally suitable to be used
in the manufacture of all three products.

Data for the year ended 30 April 2005 was as follows :

four drawer three drawer two drawer
$ $ $

Total sales 410 400 123 900 427 500
Total variable costs 304 000 88 500 285 000
Allocated fixed costs 98 000 48 000 135 000
Profit(loss) 8400 (12 600) 7 500

It had been proposed that the three-drawer cabinet be discontinued,as it was making
a loss.

(a) State whether this proposal should have been agree,giving your reasons.

If we discontinue the three drawer, we assume that fixed cost would remain the same.

four drawer three drawer two drawer
$ $ $

Total sales 410 400 0 427 500
Total variable costs 304 000 0 285 000
Allocated fixed costs 98 000 48 000 135 000
Profit(loss) 8400 -48,000 7 500

It should not be discontinued because the loss has increased from 12,600 to 48,000.

Sales and cost data for the year ended 30 April 2006 were as follows :

four- drawer three-drawer two-drawer

Sales in units 15 000 6 000 30 000

Raw materials $12 $8 $4
Variable overheads $3 $2 $2
Unit contribution $7 $6 $5

Machine hours per unit 0. 5 0. 5 0 .4

Machine operators are paid $ 10 per hour.
Allocation of fixed costs $ 98 000 $ 48 000 $ 135 000

Required :

( b ) calculate the selling price per unit for each product.

Since unit contribution is calculated from sales price per unit - variable costs per unit, we need to find the total variable costs per unit
first.

four- drawer three-drawer two-drawer

Raw materials $12 $8 $4
Variable overheads $3 $2 $2
Machine operators $5 $5 $4
Variable costs per unit $20 $15 $10

For machine operators, it is regarded as labor costs and can be found by multiply the machine hours per unit with labor cost per hour.
Machine hours per unit 0. 5 0. 5 0 .4
x $10 x $10 x $10

Variable costs per unit $20 $15 $10
Unit contribution $7 $6 $5
Selling price per unit $27 $21 $15

( c ) calculate for each product the break-even point in both units and sales value.

We can find the break-even point in both units by dividing the allocated fixed costs for each product by its unit contribution.

four- drawer three-drawer two-drawer

Allocation of fixed costs $ 98 000 $ 48 000 $ 135 000
Unit contribution $7 $6 $5

Break-even point in units 14,000 8,000 27,000

Break-even point in sales value $378,000 $168,000 $405,000

( d ) calculate for each product the profit or loss for the year ended 30 April 2006.

You need to find the total sales, total variable costs, and deduct fixed costs for each product.

four drawer three drawer two drawer
$ $ $
Sales in units 15,000 6,000 30,000

Total sales 405,000 126,000 450,000
Total variable costs 300,000 90,000 300,000
Allocated fixed costs 98,000 48,000 135,000
Profit(loss) 7,000 (12,000) 15,000

To try to improve profits for the year ending 30 April 2007,it has been suggested that a
better quality, more easily worked, raw material be purchased. This would increase the
cost of raw materials by five percent ( 5 % ) but would offer savings fo ten percent ( 10 %)
on labour. Sales and other costs would remain unchanged.

(e) calculate for each product and in total the profit ot loss if this suggestion is put into effect.

We need to find the new total variable costs per unit and contribution.

four- drawer three-drawer two-drawer

Raw materials $12.6 $8.4 $4.2
Variable overheads $3.0 $2.0 $2.0
Machine operators $4.5 $4.5 $3.6
Variable costs per unit $20.1 $14.9 $9.8

New variable costs per unit $20.1 $14.9 $9.8

four drawer three drawer two drawer
$ $ $
Sales in units 15,000 6,000 30,000

Total sales 405,000 126,000 450,000
Total variable costs 301,500 89,400 294,000
Allocated fixed costs 98,000 48,000 135,000
Profit(loss) 5,500 (11,400) 21,000