Calculate the overall break-even point in sales value for the company and the br

Question

Calculate the overall break-even point in sales value for the company and the break-even point in sales value for each product line.

Financial Information Handbags Wallets Suitcases SAR 1,000.00 SAR 500.00 SAR 1,500.00 Seling Price per unit Direct Materials (leather) cost per meter SAR 430.00 Meters of materials leather) required per unit 2 Direct Labour hour cost per unit Sales commission per tem sold Variable manufacturing overhead per unit SAR 15.00 Number of labour hours per unit Budgeted sales in units SAR 230.00 SAR 500.00 SAR 30,00 SAR 10.00 SAR 15.00 SAR 5.00 SAR 32.00 SAR 13.00 SAR 17.00 SAR 1000 240 270 100 a) Other costs Production manager annual salary SAR 60,000 Annual marketing costs General Expenses Annual Fixed manufacturing overhead (excluding depreciation) SAR7,000 (20% relates to handbags) SAR 12.000 SAR 5,000 b) The company bought specialised equipment 5 years ago which cost SAR120,000. The useful lide of this equipment is 10 years. Depreciation is allocated to manufacturing overhead expenses. c) The company had 3 handbags and 10 meters of leather in stock at the end of June. Company policy is to maintain 25% of the following months sales level as closing inventory for finished goods. d) e) Company policy to maintain 25% of next months production needs as closing inventory for direct materials. 1 Budgeted sales of handbags for the next six months are as follows: July AugustSeptember October November December 20 36 60 20 20 20 g) Cash collections on sales are as follows: 60% in the month of sale 40% in the month following sale Receivables at the end of June were SAR 3,000 h) Cash payments on purchases are as follows 55% in the month of purchase 45% in the following month Payables at the end of June were SAR 5,000 The closing cash balance in June 2016 was SAR 40.000 and it is company policy to maintain cash at this level at the end of each month.

Explanation / Answer

Break Even Point in units is calculated as Total Fixed Costs/Contribution Margin. Contribution Margin is defined as (Sales Price per Unit - Variable Costs). In essence, the problem involves classifiying costs as fixed and varaible costs. Handbags Wallets Suitcases Total Steps Budget Sales                        240                        270                        100                        610 SP per Unit                     1,000                        500                     1,500 Variable Cost Direct Costs                        860                        230                        500 We need a single unit of measurement which is the unit of product. Hence we convert the material cost from meter cost to unit cost by multiplying the number of meters required per unit. For example for Handbags 2 Meters are required costin SAR 430 per Meter = SAR 860 per unit Direct Labour Cost                          30                          15                          32 Sales Commission per unit                          10                            5                          13 Variable Manufacturing overhead                          15                          10                          17 Total Variable Costs                        915                        260                        562 The first step is to compute the variable Costs for each product line Contribution Margin                          85                        240                        938 Based on the selling price and variable costs we can calculate Contribution Margin as (Selling Price - Variable Costs) Weighted Contribution Margin                          33                        106                        154                        293 Since the Fixed costs are commonly incurred for all divisions together, we would need to apply weights to these contribution margins in order to obtain a single contribution margin for the company as a whole. The weights used are the Budgeted sales for each division. For example for Handbags weighted Contribution margin = Budget Sales for Handbags(240)*Contribution Margin for Handbags(85)/Total Budget Sales(610) = SAR 33 per unit Fixed Costs Production Manager Salary                  60,000 Annual Marketing Costs                  12,000 General Expenses                     5,000 Fixed Manufacturing Overhead                     7,000 Depreciation                  12,000 Depreciation is calculated as the value of the asset/ useful life. The number of years already in use is irrelevant. Total Fixed Costs                  96,000 Overall Break Even Point in units                        327 Using the above fixed cost and weighted contribution margin the overall breakeven point in units is computed as Total Fixed Cost(96000)/Weighted Contribution Margin(293) = 327 Split the units based on weights                        129                        145                          54 We split this break even units into each of the divisions based on the budget sales again. Break Even Point in Sales Value               1,28,715                  72,402                  80,447               2,81,564 Once the unit break even points are obtained it be multipled by the sales price for each division to obtain the Break Even Point in Sales Value. The total of these numbers (128715 + 72402 + 80447) is the overall Company's Breakeven Point in Sales Value.

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