- 20 Marks
Question
Quickspray Ltd offers professional car spraying services at Suame Magazine. The company is planning its activities for the month of June 2018 for its saloon car spraying section. The company charges a service fee of GH¢1,000 and incurs fixed cost (excluding fixed maintenance cost) and variable cost per unit (excluding variable maintenance cost) of GH¢35,000 and GH¢644.39 respectively for spraying a saloon car.
The following data also relates to Quickspray Ltd on the maintenance hours of its key machine, revenue, and profit for the six months ended April 2018:
| Month | Maintenance Hours | Revenue (GH¢) | Profit (GH¢) |
|---|---|---|---|
| November 2017 | 1,200 | 19,000 | 700 |
| December 2017 | 1,425 | 24,000 | 1,425 |
| January 2018 | 1,410 | 20,100 | 650 |
| February 2018 | 1,400 | 20,000 | 1,000 |
| March 2018 | 1,175 | 18,000 | (125) |
| April 2018 | 1,275 | 19,000 | 175 |
Total fixed cost increases by GH¢1,120 when maintenance hours go beyond 1,400.
Required:
a) Determine the total maintenance cost of production, using the high-low method if:
i) Maintenance hours for May are budgeted to be 1,520.
ii) Maintenance hours for June are budgeted to be 1,075.
b) Calculate for the month of May the:
i) Break-even point in units and value.
ii) Sales level required to make an after-tax profit of GH¢21,150, assuming Quickspray Ltd is in the 25% tax bracket.
iii) Margin of safety if the target after-tax profit of GH¢21,150 is achieved.
Answer
a) Determination of Total Maintenance Cost Using High-Low Method:
i) High-Low Method Calculation:
- Variable Cost per Unit:
Variable Cost per Unit=Highest Cost−Lowest CostHighest Activity Level−Lowest Activity Level\text{Variable Cost per Unit} = \frac{\text{Highest Cost} – \text{Lowest Cost}}{\text{Highest Activity Level} – \text{Lowest Activity Level}} Variable Cost per Hour=(22,575−18,125)(1,425−1,175)=4,450250=GH¢13.32 per hour\text{Variable Cost per Hour} = \frac{(22,575 – 18,125)}{(1,425 – 1,175)} = \frac{4,450}{250} = GH¢13.32 \text{ per hour}
- Total Fixed Cost (Activity exceeds 1,400 hours):
Total Fixed Cost=Total Cost at Maximum Activity Level−(Variable Cost per Hour×Maximum Activity Level)\text{Total Fixed Cost} = \text{Total Cost at Maximum Activity Level} – (\text{Variable Cost per Hour} \times \text{Maximum Activity Level}) Total Fixed Cost=GH¢22,575−(GH¢13.32×1,425)=GH¢22,575−GH¢18,981=GH¢3,594\text{Total Fixed Cost} = GH¢22,575 – (GH¢13.32 \times 1,425) = GH¢22,575 – GH¢18,981 = GH¢3,594
- Total Fixed Cost (Activity below 1,400 hours):
Total Fixed Cost=GH¢3,594−GH¢1,120=GH¢2,474\text{Total Fixed Cost} = GH¢3,594 – GH¢1,120 = GH¢2,474
ii) Maintenance Cost Calculation:
- For May 2018 (1,520 hours):
Maintenance Cost=Fixed Cost+(Variable Cost per Hour×Maintenance Hours)\text{Maintenance Cost} = \text{Fixed Cost} + (\text{Variable Cost per Hour} \times \text{Maintenance Hours}) Maintenance Cost=GH¢3,594+(GH¢13.32×1,520)=GH¢3,594+GH¢20,246.40=GH¢23,840.40\text{Maintenance Cost} = GH¢3,594 + (GH¢13.32 \times 1,520) = GH¢3,594 + GH¢20,246.40 = GH¢23,840.40
- For June 2018 (1,075 hours):
Maintenance Cost=GH¢2,474+(GH¢13.32×1,075)=GH¢2,474+GH¢14,319=GH¢16,793\text{Maintenance Cost} = GH¢2,474 + (GH¢13.32 \times 1,075) = GH¢2,474 + GH¢14,319 = GH¢16,793
b) Calculations for May:
i) Break-Even Point:
- Break-Even Point in Units:
BEP (Units)=Total Fixed CostContribution per Unit\text{BEP (Units)} = \frac{\text{Total Fixed Cost}}{\text{Contribution per Unit}} BEP (Units)=GH¢35,000+GH¢3,594GH¢1,000−(GH¢644.39+GH¢13.32)=GH¢38,594GH¢342.29≈113 cars\text{BEP (Units)} = \frac{GH¢35,000 + GH¢3,594}{GH¢1,000 – (GH¢644.39 + GH¢13.32)} = \frac{GH¢38,594}{GH¢342.29} \approx 113 \text{ cars}
- Break-Even Point in Sales Value:
BEP (Sales Value)=BEP (Units)×Selling Price per Unit\text{BEP (Sales Value)} = \text{BEP (Units)} \times \text{Selling Price per Unit} BEP (Sales Value)=113×GH¢1,000=GH¢113,000\text{BEP (Sales Value)} = 113 \times GH¢1,000 = GH¢113,000
ii) Sales Level for After-Tax Profit of GH¢21,150:
- Required Sales Level:
Required Sales Level=Total Fixed Cost+ProfitContribution Margin Ratio\text{Required Sales Level} = \frac{\text{Total Fixed Cost} + \text{Profit}}{\text{Contribution Margin Ratio}} Required Sales Level=GH¢38,594+GH¢21,150/(1−0.25)0.34229=GH¢38,594+GH¢28,2000.34229=GH¢195,138.63\text{Required Sales Level} = \frac{GH¢38,594 + GH¢21,150/(1 – 0.25)}{0.34229} = \frac{GH¢38,594 + GH¢28,200}{0.34229} = GH¢195,138.63
iii) Margin of Safety:
- Margin of Safety Calculation:
Margin of Safety (%)=Budgeted Sales Level−Break-Even SalesBudgeted Sales Level×100\text{Margin of Safety (\%)} = \frac{\text{Budgeted Sales Level} – \text{Break-Even Sales}}{\text{Budgeted Sales Level}} \times 100 Margin of Safety (%)=GH¢195,138.63−GH¢113,000GH¢195,138.63×100=42.10%\text{Margin of Safety (\%)} = \frac{GH¢195,138.63 – GH¢113,000}{GH¢195,138.63} \times 100 = 42.10\%
- Tags: Break-Even Point, High-Low Method, Maintenance Costs, Margin of Safety, Profit Planning
- Level: Level 2
- Topic: Cost-Volume-Profit (CVP) Analysis, High/Low Analysis
- Series: NOV 2020
- Uploader: Dotse