Importance of Management Accounting

Online Exam

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Question 1:
a. Breakeven point of the Sandals for Solent Ltd.
Contribution per unit:
Amount per unit (£)
Selling price £5.75
Less: COGS
Direct labor £1.35
Direct Materials £1.75
Other direct costs £0.40
Contribution £2.25
Breakeven point in units:
= ¿ cost
Contribution per unit = £ 180,000
£ 2.25 = 80,000 Units
Hence, it can be concluded that Solent Ltd. requires to sale atleast 80,000 units of Sandals to
cover its fixed expense and to attain the situation of no profit no loss. Besides this, company
should also add marginal safety to calculate Breakeven point; so that it could avoid the situation
of out of stock.
Breakeven point in revenues:
= Breakeven point in units × Selling price
= 80,000 × £5.75
= £460,000
Therefore, it can be concluded that; Solent Ltd. requires to generate atleast £460,000 revenue to
cover its fixed expenses; but company will not able to record neither profit nor losses.
b. Calculate the profit made on sales 90,000 units
Amount per unit
(£) Units Total (£) Total (£)
Selling price £5.75 90,000
£517,50
0
Less: COGS

Direct labor £1.35 90,000
£121,50
0
Direct Materials £1.75 90,000
£157,50
0
Other direct costs £0.40 90,000 £36,000
£315,00
0
Contribution
£202,50
0
Less: Periodic cost
Fixed cost
£180,00
0
£180,00
0
Net Profit £22,500
Therefore, company will earn £22,500 profit by selling 90,000 units.
c. New profit figure
Amount per unit
(£) Units Total (£) Total (£)
Selling price £6.00 94,500
£567,00
0
Less: COGS
Direct labor £1.40 94,500
£132,30
0
Direct Materials £1.90 94,500
£179,55
0
Other direct costs £0.40 94,500 £37,800
£349,65
0
Contribution
£217,35
0
Less: Periodic cost
Advertising campaign £12,500
Fixed cost
£180,00
0
£192,50
0
Net Profit £24,850
Hence, after improvement of product; Solent Ltd. will get revised profit of £24,850 which is
£2,350 more than that of previous profit.
d. Limitations of break-even analysis
Break-even analysis seems to be a very important and useful guide to decision making. Overall,
the break-even charts are moderately simple to construct and provide data to managers on return