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QUESTION.

The Mgulani JKT Furniture Company produces and sells a single high-priced chair and in fiscal
2015 the company produced and sold 30,000 units. The 2015 income statement of the company
reported the following:
Mgulani JKT Furniture Company

Income Statement
For Fiscal Year 2015
Total Tsh’s
Sales 1,800,000
Variable Costs 1,350,000
Contribution Margin 450,000
Fixed Costs 240,000
Income before Taxes 210,000
Tax Expense 63,000
Income after Taxes 147,000

Note: total sales and production: 30,000 units

Determine the following items:


i. Calculate the per unit figures for each item from the information provided above. Determine
which of these figures is needed for performing C-V-P analysis.
ii. Determine the company's margin of safety in units for fiscal 2015.
iii. Determine the company's degree of operating leverage at the current level of operations. If
the company's sales in units were to increase 30%, how much would profits before taxes increase
in p percentage terms
iv. Compute the sales level required in units to achieve a level of profits before taxes of
Tsh.270,000.
v. Based on the original data above, determine the sales level required if the company desires a
profit after taxes of Tsh.210,000. It is believed that the tax rate will remain at current levels.
vi. Management has decided to raise the price of its product to Tsh.65 per unit. It also will spend
an additional Tsh.102,000 per year for advertising. Although it has never paid commissions
before, the company has decided to begin paying sales personnel Tsh.1 per unit for every unit
sold. Determine the new breakeven point. Also determine the safety margin of the company
under this plan if sales only reach 27,000 units.
i); to calculate the unit per figure for each items
Solution;
Recall;
Unit per figure = total amount of each items÷ total unit of sales and production.

DETAIS TOTAL AMOUNT WORKING UNIT PER


OF ITEMS (Tsh) Amount ÷ Unit of sales FIGURE
Sales 1,800,000 1,800,000÷30,000 60
Less Variable cost 1,350,000 1,350,000÷30,000 45
Contribution margin 450,000 450,000÷30,000 15
Less Fixed cost 240,000 240,000÷30,000 8
Income Before Taxes 210,000 210,000÷30,000 7
Less Tax expenses 63,000 63,000÷30,000 2.1
Income After Taxes 147,000 147,000÷30,000 4.9

Also to determine the figures needed to the performing CVP analysis

The following are the figures which needed to the performing CVP analysis;

 Sales = Tsh.1,800,000 ÷ 30,000 unit = 60 per unit


 Variable cost = Tsh.1,350,000 ÷ 30,000 unit = 45 per unit
 Contribution margin = Tsh.450,000 ÷ 30,000 unit = 15 per unit
 Fixed cost = Tsh.240,000 ÷ 30,000 unit = 8 per unit

Sales used in order to obtain the unit price


Contribution margin = price – variable cost
Fixed cost remain constant
ii) To determine the company margin safety

Recall;

Marginal safety= Total sales and production Breakeven Point in unity (BEP).
But; BEP = Fixed cost
Contribution margin in unity

Breakeven Point (BEP) = 240,000/15 per unit = 16,000 units

So margin safety = Total sales and production Breakeven Point

Safety Margin = 30,000 units - 16,000 units = 14,000 units.

Hence; the margin safety = 14,000 units.

iii) To determine the degree of Operating Leverage

solution

Given data bellow,

Total Contribution Margin (CM )= Tsh450,000

Total Income Bfore (Taxes IBT) = Tsh210,000

Degree of Operating Leverage (DOL) = Total Contribution Margin


Total Income Before Taxes.

DOL = Tsh.450,000
Tsh.210,000
= 2.148
Hence; the degree of operating leverage= 2.14
If the company’s sales in units were increase by 30% the profit before taxes will increase in
percentage of term;

Percentage increase in profit = percentage increase in sales x percentage of operation


leverage

Percentage increase in Profits = 30% x 2.14 = 64.2%

Hence; the percentage of increase in profits = 64.2%

iv) To compute the sales level required in units to achieve a level of profits before taxes of
Tsh270,000.

Data given below,

Targeted Income (Profit)= Tsh 270,000

Total Fixed Cost = Tsh 240,000

Contribution margin in units= 15units

Recall the formula,


Sales level required = Total Fixed Cost + Targeted profit
Contribution margin (CM)

Sales Level Required = (Tsh240,000 + Tsh270,000)/Tsh15 per unit = 34,000 units

Hence; the sales level required = 34,000 units


V); Sales level required if the company desire a profit after taxes of Tsh210,000

Data given;

Taxes expenses = Tsh.63,000

Income Before Taxes = Tsh.210,000

Fixed Cost = Tsh.240,000

Targeted Profit = Tsh.210,000

Require taxes rate,

Taxes Rate = Taxes expenses/Income Before Taxes

Tax Rate = Tsh.63,000 /Tsh.210,000 = .30 or 30%.

From the formula;


Targeted sales after taxes= fixed cost + [targeted income/(1- taxes rate)]
Contribution per unit

= 240,000 + [210,000/(1-0.3)]
15 units

= 36,000 units

Hence; the sales after taxes = 36,000 units

vi), to determine the new Breakeven Point

Data given;

Sales per unity = Tsh.65 per unit

Fixed cost = Tsh.240,000 + Tsh.102,000

= Tsh.342,000

Variable cost per unit = 45 + 1 = 46 units

Contribution margin per unit = Tsh65 per unit – Tsh46 per unit = Tsh19 per unit
Recall;
Breakeven Point (BEP) = Total fixed cost
Contribution margin per unit

= 342,000
19

= 18,000 units

Hence the new Breakeven Point = 18,000 units

Also safety margin if sales only reach 27,000 units


Recall;
Safety margin = Total units sold Breakeven Point in units
= 27,000 18,000
= 9,000 units
Hence the margin safety = 9,000 units