Class exercises.
Question 3
Max Pram provides you with the following information:
Selling price per unit
R79.00
Fixed administrative cost
R45000
Total fixed manufacturing overhead
R95000
Total fixed marketing cost
R30000
Direct material cost per unit
R12.50
Direct labour cost per unit
R23.60
Variable overheads
R14.90
Sales commission
5% of the selling price per
unit
(1) How many units must Max Pram sell in order to break-even? Show the contribution.
(2) What is the breakeven sales value and margin of safety units if Max sells 7950 units during
that period?
(3) The marketing director makes the following statement at a meeting: “my department
conducted market research and we found that a 10% decrease in selling price will give us an
advantage as our prices will then be lower than the prices of our competitors. The 10% decrease
in our sales price will increase sales volume to 9500 units compared to our current sales volume of
7500 units. The increase in sales volume will then obviously increase our profits”. Do you agree
with the marketing directors? Show all the relevant calculations to justify your answer.