Analysis of Desklib's Product Performance and Financial Planning

This report analyzes Desklib's product performance and financial planning. It includes a break-even analysis, CVP chart, master budget, and recommendations for improving profitability. The report also discusses the implications of eliminating sales commission and discontinuing the manufacture of chairs.

a)
i. Which product is performing the best?
- TV Tables:
Sales = Number of units * Price per unit
= (300) * (1000)
= 300,000
Variable Cost =
DM 50 * 10 * 300 150,000
DL 30 * 3 * 300 27,000
SC 10 * 300 3,000
VMO 20 * 300 6,000
Total 186,000
CM = Sales – VC
= (300,000) – (186,000)
= 114,000
- Dining Tables:
Sales = Number of units * Price per unit
= (200) * (5000)
= 1,000,000
Variable Cost=
CM = Sales – VC
= (1,000,000) – (281,800)
= 718,200
DM 50 * 25 * 200 250,000
DL 30 * 4 * 200 24,000
SC 15 * 200 3,000
VMO 24 * 200 4,800
Total 281,800

- Chairs:
Sales = Number of units * Price per unit
= (450) * (700)
= 315,000
Variable Cost:
CM = Sales – VC
= (315,000) – (149,000)
= 165,150
The product with the best performance is dining tables; it has the highest CM.
ii. Calculate the overall break-even point in sales value for the company and the break-
even point in sales value for each product line.
Fixed Cost =
Production manager annual salary 60,000
Annual Fixed manufacturing overhead 10,000
Annual Marketing Costs 10,000
Depreciation 10,000
General Expenses 5,000
Total 95,000
CM Ratio =Total CM / Total Sales
= 997,350 / 1,615,000
= 0.617
Breakeven Point for the company (In sales) = Fixed Cost / CM Ratio
= 95,000 / 0.617
= 153,970.8
BEP of TV Tables (In sales) = 95,000 / (114,00 / 300,000)
= 95,000 / 0.38
= 250,000
BEP of Dining Tables (In sales) = 95,000 / (718,200/1,000,000)
DM 50 * 5 * 450 112,500
DL 30 * 2 * 450 27,000
SC 5 * 450 2,250
VMO 18 * 450 8,100
Total 149,850

= 95,000 / 0.718
= 132,311.9
BEP of Chairs (In sales) = 95,000/ (165,150 / 315,000)
= 95,000 / 0.524
= 181,279.7
iii. If the selling price of TV tables is increased to SAR 1,200 per unit, what will be the
increase in overall profit.
TV Tables
(Initial Price)
Dining
Tables Chairs Total
Sales 300,000 1,000,000 315,000 1,615,000
Less VC 186,000 281,800 149,850 617,650
CM 114,000 718,200 165,150 997,350
Less FC 95,000
Net Profit 902,350
TV Tables
(New Price)
Dining
Tables Chairs Total
Sales 360,000 1,000,000 315,000 1,675,000
Less VC 186,000 281,800 149,850 617,650
CM 174,000 718,200 165,150 1,057,350
Less FC 95,000
Net Profit 962,350
A 200 SA increase in the price of TV tables results in a 60,000 SA increase in overall profit.
iv. What level of sales (value) must the company achieve to make a profit of SAR 1,500,000.
Sales required to achieve the target profit = (FC + Target profit) / CM Ratio
= (95,000 + 1,500,000) / 0.617
= 1,595,000 / 0.617
= 2,585,089

v. CVP graph outlining the costs, break-even point and profit and loss areas.
0 50 100 150 200 250 300 350 400 450 500
0
500000
1000000
1500000
2000000
2500000
3000000
3500000
CVP Chart
Sales
Linear (Sales)
Total Cost
Linear (Total Cost)
Units
Sales
b) The company is considering eliminating sales commission and increasing salaries by
SAR40,000. Outline the implications of making this decision on the overall break-even
point in sales value and the overall profit or loss for the company. Should the company
proceed with this decision?.
TV Tables
(Initial Price) Dining Tables Chairs Total
Sales 300,000 1,000,000 315,000 1,615,000
Less VC 183,000 278,800 147,600 609,400
CM 117,000 721,200 167,400 1,005,600
Less FC 135,000
Net Profit 870,600
CM Ratio = Total CM / Total Sales
= 1,005,600 / 1,615,000

= 0.622
BEP = Fixed Cost / CM Ratio
= 135,000/ 0.622
= 217,041.2
If we eliminated the sales commission the variable costs of the production will
decrease by 8,250 which leads to an increase in the CM. However, the fixed costs will
increase by 40,000 (Increase in salaries) leading to a drop in the net profit by 31,700.
Thus, the company should not proceed with this decision.

c) The company is considering discontinuing the manufacture of chairs and have asked
you to advise them on this decision. (35% of annual marketing costs relate specifically
to this product and SAR1,500 of general expenses is directly attributable to this
product).
Sales 315,000
Less Variable Expenses
Direct Materials 112,500
Direct Labour 27,000
Sales Commissions 2,250
Variable Manufacturing Overhead 8,100 149,850
Contribution Margin 165,150
Less Fixed Expenses
35% of annual MC 3,500
General Expenses 1,500 5,000
The contribution margin is higher than the costs, then the company should continue producing
chairs.

d) Using the information above, prepare the master budget for TV tables only for the quarter
ending 30th September 2014.
SALES BUDGET JULY AUGUST SEPTEMBER OCTOBER QUARTER
SALES 40 35 20 20 95
SALES PRICE PER UNIT 1,000 1,000 1,000 1,000 1,000
EXPECTED SALES 40,000 35,000 20,000 20,000 95,000
PRODUCTION BUDGET JULY AUG SEPTEMBER OCTOBER QUARTER
SALES 40 35 20 20 95
ADD CLOSING INV (20%) 7 4 4 4 4
TOTAL NEEDED 47 93 24 24 99
LESS OPENING INV (8) (7) (4) (4) (8)
TOTAL PRODUCTION
REQUIRED 39 32 20 20 91
DIRECT MATERIALS
BUDGET JULY AUGUST SEPTEMBER OCTOBER QUARTER
REQUIRED PRODUCTION 39 32 20 20 91
MATERIALS PER UNIT 10 10 10 10 10
TOTAL DM NEEDED 390 320 200 200 910
ADD CLOSING INV (25%) 80 50 50 50 50
LESS OPENING INV (100) (80) (50) (50) (100)
TOTAL DM TO BE
PURCHASED 370 290 200 200 860
PURCHASE PRICE 50 50 50 50 50
TOTAL COST OF DM
PURCHASES 18,500 14,500 10,000 10,000 43,000
DIRECT LABOUR BUDGET JULY AUGUST SEPTEMBER OCTOBER QUARTER
REQUIRED PRODUCTION 39 32 20 20 91
LABOUR HOURS 3 3 3 3 3
TOTAL HOURS NEEDED 117 96 60 60 273
LABOUR COST PER HOUR 30 30 30 30 30
TOTAL LABOUR COST 3,510 2,880 1,800 1,800 8,190

MANUFACTURING
OVERHEAD BUDGET JULY AUGUST SEPTRMBER OCTOBER QUARTER
PRODUCTION IN UNITS 39 32 20 20 91
VMO PER UNIT COST 20 20 20 20 20
TOTAL VMO COST 780 640 400 400 1,820
FIXED MANUFACTURING
OVERHEAD 166.6 166.6 166.6 166.6 500
TOTAL MANUFACTURING
OVERHEAD 946.6 806.6 566.6 566.6 2,320
SG & ABUDGET JULY AUGUST SEPTEMBER OCTOBER QUARTER
BUDGETED SALES 40 35 20 20 95
SALES COMMISSION 10 10 10 10 10
TOTAL VARIABLE
EXPENSES 400 350 200 200 950
MARKETING COST 833.3 833.3 833.3 833.3 2500
CASH DISBURSMENT OF
SG&A 1,233.3 1,183.3 1,033.3 1,033.3 3,450
CASH BUDGET JULY AUGUST SEPTEMBER OCTOBER QUARTER
OPENING BALANCE 40,000
ADD CASH COLLECTIONS
ACCOUNT REC. JUNE 22,000 22,000
SALES
JULY 30% OF 40,000 12,000 12,000
JULY 70% OF 40,000 28,000 28,000
AUGUST 30% OF 35,000 10,500 10,500
AUGUST 70% OF 35,000 24,500 24,500
SEPTEMBER 30% OF
20,000 6,000 6,000
SEPTEMPER 70% OF
20,000 14,000 14,000
INVESTMENT OF 50,000 50,000 50,000
TOTAL CASH COLLECTIONS 34,000 38,500 80,500 14,000 153,000

LESS DISBURSMENTS
ACCOUNT PAY. JUNE 6,000 6,000
PURCAHSES
JULY 60% OF 18,500 11,100 11,100
JULY 40% OF 18,500 7,400 7,400
AUGUST 60% OF 14,500 8,700 8,700
AUGUST 40% OF 14,500 5,800 5,800
SEPTEMBER 60% OF
10,000 6,000 6,000
SEPTEMBER 40% OF
10,000 4,000 4,000
LABOUR COST 3,510 2,880 1,800 1,800 8,190
MANUFACTURING
OVERHEAD 946.6 806.6 566.6 566.6 2,320
SELLING &
ADMINISTERATIVE EXP. 1,233.3 1,183.3 1,033.3 1,033.3 3,450
DIVIDEND 40,000 40,000
TOTAL DISBURSMENTS 22,790 60,970 15,200 98,960
CASH AVAILABLE OVER
DISBURSMENT 11,210 -22,470 65,300 94,210
ADD CLOSING BALANCE
OF LAST MONTH 40,000 51,210 40,000
TOTAL 51,210 28,740 105,300
FINANCING &
REPAYMENT
LOAN 11,260
REPAYEMENT OF LOAN (11,260)
INTEREST %4 (37.5)
ENDING CASH BALANCE 51,210 40,000 94,002.5