Accounting Business Reporting for Decision Making

458 Accounting: Business Reporting for Decision Making

Selling price per unit

Total fixed overhead

$ 70

360 000

Production costs per unit

Direct materials

Direct labour

Variable overhead

$ 22

16

2

Saguaro Systems normally produces 25 000 of these systems per year.

The managers have recently received an offer from a Mexican company to produce these

systems for $48 each. The managers estimate that $260 000 of Saguaro Systems’ fixed costs

could be eliminated if it accepts the offer.

Required

a. Perform a quantitative analysis for the decision.

b. Identify as many uncertainties as you can for this decision.

c. Prepare a brief report to management on your recommendations.

10.54 Break-even: single product; profit calculation; second product introduced    LO2

Pruton Processing is a single-product entity, and provides the following summary data relating to

its product for 2017.

Selling price per unit

Variable manufacturing costs

Annual fixed manufacturing costs

Variable marketing, distribution and administration costs

Annual fixed non-manufacturing costs

Annual volume

$

$

$40

$14

300 000

$10

180 000

38 000 units

Required

a. Calculate the break-even in units and sales dollars for 2017.

b. Calculate the profit earned in 2017.

c. Pruton Processing is considering introducing a second product that would result in the

following estimates.

Product A Product B

Expected sales volume in units

Selling price per unit

Variable costs per unit

Annual fixed costs

35 000

$40

$24

15 000

$26

$14

$621 600

i. Calculate the number of units (in total and per product) required to break even.

ii. Calculate the number of units (in total and per product) required — in the first year of the two

products — to earn the same profit as for 2017.

10.55 Break-even; alternative cost structures    LO2, 6

The statement of profit or loss for Menage Industries for 2016 is as follows.

Menage Industries

Statement of profit or loss for year ending 31 December 2016

Sales revenue (200 000 units)

Cost of sales

$2 000 000

1 200 000

Gross profit

Operating costs

Marketing and distribution

Administration

$ 460 000

440 000

800 000

900 000

Profit (loss) $(100 000 )