Topic 3-Cost-Volume-Profit analysi Barossa Bark sells fertilizer for gardens in

ID: 2551777 • Letter: T

Question

Topic 3-Cost-Volume-Profit analysi Barossa Bark sells fertilizer for gardens in Tanunda. The company currently only sells 1 type of fertilizer in 10 kg bags. The fertlizer is bought from a farmer and repackaged in 10 kg bags before it is sold. The budgeted cost structure of the company is as follows: Cost Fertilizer Packa Labour required to do packaging$30 per hour (9 bags can be Price $1 100 per 500 k $2.40 Fixed overhead costs Rent $20 000 per annum $15 000 per month The fertilizer is sold at $35 per unit (10 kg bag). Barossa Bark is now considering to add soil enhancement to their product range. The soil enhancement can be bought at $2.10 per kilogram. Packaging cost will be $0.50 per bag and labour cost to package each bag will be the same as the labour cost for the fertliser. Soil enhancement will be sold in 3kg bags at a selling price of $20 per bag. If Barossa Bark also starts selling soil enhancement, the sales mix will be twelve units (bags) of fertilizer sold for every sixteen units (bags) of soil enhancement sold. Fixed overheads will increase by $18 000 per annum if soil enhancement is added as a product.

Explanation / Answer

Cost of fertilizer per kg = $ 1,100/ 500 = $ 2.2

Cost of fertilizer per beg or 10 kg = $ 2.2 x 10 = $ 22

Labor required for packaging per bag = $ 30/9 = $ 3.33

Sales per unit

$ 35.00

Less: Variable cost

Fertilizer per unit

$ 22.00

Packaging

$ 2.40

Labor

$ 3.33

Contribution margin per unit

$ 7.27

Fixed cost :

Telephone ( $ 400 x 12)

$ 4,800

Rent ($ 6,000 x 12)

$ 72,000

Electricity

$ 20,000

Administrative staff salaries($ 15,000 x 12)

$ 180,000

Total fixed cost per annum

$ 276,800

Breakeven point in units = Fixed Cost / Contribution margin per unit

= $ 276,800/$ 7.27

= 38,092 units

Breakeven point in dollar = Breakeven point in units x sales per unit

= 38,092 x $ 35 = $ 1,333,220

4. No of units to be sold for target profit of $140,000

= Desired Profit + Fixed Cost/ Contribution margin per Unit

= $ 140,000/70 % + $276,800/$7.27

= $ 200,000 + $ 276,800/$7.27

= $ 476,800/$ 7.27

= 65,585 units

**** Answered first 4 questions.