Accounting Business Reporting for Decision Making

446 Accounting: Business Reporting for Decision Making

APPLY YOUR KNOWLEDGE 22 marks

Juices R Us sells bottles of freshly squeezed juice to small convenience stores throughout Melbourne. Its

latest statement of profit or loss for the last 12 months is as follows.

Juices R Us

Statement of profit or loss

Sales (100 000 bottles × $5)

Less: Cost of sales (100 000 bottles × $3)*

$ 500 000

300 000

Gross profit $ 200 000

Less: Other expenses

Advertising

Manager’s salary

Occupancy and admin

$

$

10 000

50 000

20 000 80 000

#

Profit $ 120 000

*all variable costs
#all fixed costs

Required
a. Calculate the contribution margin per juice bottle. 2 marks

b. Calculate the number of juice bottles to break even in both units and sales dollars. 2 marks

c. The company expects to sell 115 000 units in the coming year.
i. What is the margin of safety at this level of activity? 1 mark
ii. How much profit will the business make for the year if its estimated level of activity
is accurate? 1 mark
d. The company estimates that if it reduced the selling price by $0.30 per bottle, spent

an additional $20 000 on advertising for the year, and improved the appearance of the

juice bottle (at an extra cost of $0.15 per bottle), sales for the year would rise to 155 000 units.

Using supporting calculations, advise whether the company should make these changes

or retain the existing revenue and cost structure and go with the 115 000 units sales plan. 4 marks

e. Juices R Us could avoid the manager’s salary costs by paying her $1.00 for every bottle

sold. In what circumstances would Juices R Us benefit from switching to this arrangement?

(Revert to original cost scenario.) 4 marks

f. Juices R Us is introducing a new product, ‘exotic juice’. The exotic juice will sell for

$5.50. The only additional variable cost is the additional of the ‘special exotic’ supplement
at $0.50 per bottle. Other variable costs are as per the original cost scenario for the regular
fresh juice bottle. Fixed costs will increase by $15 000 per year due to both administrative
and production changes. Considering this information, what would be the weighted average
contribution margin of ‘standard juice’ and ‘exotic juice’? 4 marks
g. The sales mix is expected to be 85 per cent standard juice and 15 per cent exotic juice.

What is the new break-even point for Juices R Us and the breakdown per product type? 4 marks

Self-evaluation activities

10.1 The table below shows selected data relevant to CVP analysis.

Selling

price/unit

Variable

costs/unit Units sold

Contribution

margin (total $) Fixed costs Profit (loss)

$ 40

55

44

?

100

$

?

25

22

75

?

5 000

?

?

2 500

1 000

$

?

30 000

?

72 500

?

$ 60 000

?

115 000

28 000

60 000

$ 40 000

0

(5 000

?

(20 000

)

)