Financial Information Handbags Wallets Suitcases SAR 1,000.00 SAR 500.00 SAR 1,5

Question

Financial Information Handbags Wallets Suitcases SAR 1,000.00 SAR 500.00 SAR 1,500.00 Seling Price per unit Direct Materials (leather) cost per meter SAR 430.00 Meters of materials leather) required per unit 2 Direct Labour hour cost per unit Sales commission per tem sold Variable manufacturing overhead per unit SAR 15.00 Number of labour hours per unit Budgeted sales in units SAR 230.00 SAR 500.00 SAR 30,00 SAR 10.00 SAR 15.00 SAR 5.00 SAR 32.00 SAR 13.00 SAR 17.00 SAR 1000 240 270 100 a) Other costs Production manager annual salary SAR 60,000 Annual marketing costs General Expenses Annual Fixed manufacturing overhead (excluding depreciation) SAR7,000 (20% relates to handbags) SAR 12.000 SAR 5,000 b) The company bought specialised equipment 5 years ago which cost SAR120,000. The useful lide of this equipment is 10 years. Depreciation is allocated to manufacturing overhead expenses. c) The company had 3 handbags and 10 meters of leather in stock at the end of June. Company policy is to maintain 25% of the following months sales level as closing inventory for finished goods. d) e) Company policy to maintain 25% of next months production needs as closing inventory for direct materials. 1 Budgeted sales of handbags for the next six months are as follows: July AugustSeptember October November December 20 36 60 20 20 20 g) Cash collections on sales are as follows: 60% in the month of sale 40% in the month following sale Receivables at the end of June were SAR 3,000 h) Cash payments on purchases are as follows 55% in the month of purchase 45% in the following month Payables at the end of June were SAR 5,000 The closing cash balance in June 2016 was SAR 40.000 and it is company policy to maintain cash at this level at the end of each month.

Explanation / Answer

1. The implication of eliminating sales commission and increasing salaries by SAR40,000 on overall break even point in sales value and overall profit or loss of the company. Break even point in sales value = Fixed expenses / contribution margin ration Fixed expenses Production manager annual salary SAR60,000 Annual Marketing cost SAR12,000 General expenses SAR5,000 Annual Fixed manufacturing overheads SAR7000 Increased Salaries SAR40,000 Depreciation SAR12,000 Total Fixed expenses SAR136,000 Contribution Margin Handbags Wallets Suitcases Total Budgeted sales in units 240 270 100 610 Sales price per unit 1000 500 1500 Sales Revenue 240000 135000 150000 525000 Less: Variable Costs 0 Direct Material 206400 62100 150000 418500 Direct Labour 7200 4050 3200 14450 Variable manufacturing overhead 3600 2700 1700 8000 Total Variable costs 217200 68850 154900 440950 Contribution margin 22800 66150 -4900 84050 Contribution Margin ratio 9.50% 49.00% -3.27% 16.01% Breakeven point in sales value = SAR136,000/16% = SAR850,000 If sales commission is not eliminated Fixed expenses Production manager annual salary SAR60,000 Annual Marketing cost SAR12,000 General expenses SAR5,000 Annual Fixed manufacturing overheads SAR7000 Depreciation SAR12,000 Total Fixed expenses SAR96,000 Contribution Margin Handbags Wallets Suitcases Total Budgeted sales in units 240 270 100 610 Sales price per unit 1000 500 1500 Sales Revenue 240000 135000 150000 525000 Less: Variable Costs 0 Direct Material 206400 62100 150000 418500 Direct Labour 7200 4050 3200 14450 Sales Commission 2400 1350 1300 5050 Variable manufacturing overhead 3600 2700 1700 8000 Total Variable costs 219600 70200 156200 446000 Contribution margin 20400 64800 -6200 79000 Contribution Margin ratio 8.50% 48.00% -4.13% 15.05% Breakeven point in sales value = SAR96,000/15% = SAR640,000 By eliminating sales commission, breakeven point in sales value increases from SAR640,000 to SAR850,000 and overall loss for the company increases from SAR17,000 (79000-96000) to SAR51,950 (84050-136000), thus the company should not proceed with this decision 2. Discontinuing the manufacture of suitcase Discontinuing the manufacture of suitcase will reduce the fixed expenses Total fixed expenses 96000 Less: 40% annual marketing expenses -4800            general expenses directly attributable to            this product -2000 Fixed expenses 89200 Handbags Wallets Total Budgeted sales in units 240 270 510 Sales price per unit 1000 500 Sales Revenue 240000 135000 375000 Less: Variable Costs Direct Material 206400 62100 268500 Direct Labour 7200 4050 11250 Sales Commission 2400 1350 3750 Variable manufacturing overhead 3600 2700 6300 Total Variable costs 219600 70200 289800 Contribution margin 20400 64800 85200 Less: Fixed cost 89200 Net Loss -4000 Discontinuing the manufacture of suitcases will reduce the company's overall loss from SAR17000 (as calculated earlier) to SAR4,000. Thus the company can take this decision and discontinuing the manufacture of suitcases 3. Master budget for handbags for quarter ending 30th September July August September Oct Budgeted sales in units 20 36 60 20 Add: Ending Inventory required 9 15 5 5 Less: Beginning Inventory 3 9 15 5 Units to be manufactured 26 42 50 20 Meters of material required per unit 2 2 2 2 Material required in meters 52 84 100 40 Add: Ending Inventory of material 21 25 10 10 Less: Beginning inventory of material 10 21 25 10 Total material required 63 88 85 40 Material cost per meter 430 430 430 430 Total material cost 27090 37840 36550 17200 Selling Price per unit 1000 1000 1000 1000 Sales revenue 20000 36000 60000 20000 Cash collection 60% collection in the month of sales 12000 21600 36000 12000 40% collection in the month following sale 3000 8000 14400 24000 Total cash collection 15000 29600 50400 36000 Cash payment on purchases 55% payment in the month of purchase 14900 20812 20103 9460 45% payment in the following month 5000 12191 17028 16448 Total cash payment 19900 33003 37131 25908 Opening Cash Balance 40000 40000 40000 44968 Add: Cash Collection 15000 29600 50400 36000 Less: Cash payment 19900 33003 37131 25908 Ending cash balance 35101 36598 53270 55061 Add: Short term Borrowings 4900 3403 -8302 Ending cash balance 40000 40000 44968 55061 *Rounding off difference 4. Traditional budgeting provide a framework of control to manage activities with stabitity but it is a very time consuming process. It concentrate mainly on cost reduction and inspite of traditional budgeting management should consider implementing balanced scorecard, which is a semi-standard structured report, that can be used by mangers to keep track of the activities performed by the staff with in their control and to monitor the result of their action. Working note: Direct material cost Handbags Wallets Suitcases Budgeted sales in units 240 270 100 Material required per unit (in meters) 2 1 3 Material required (in meters) 480 270 300 Direct material cost per meter 430 230 500 Direct material cost 206400 62100 150000 Direct labour cost Handbags Wallets Suitcases Budgeted sales in units 240 270 100 Direct labour hour cost per unit 30 15 32 Direct labour cost 7200 4050 3200 Variable manufacturing overhead Handbags Wallets Suitcases Budgeted sales in units 240 270 100 Variable manufacturing overhead cost per unit 15 10 17 Variable manufacturing overhead 3600 2700 1700 Sales commission Handbags Wallets Suitcases Budgeted sales in units 240 270 100 Sales commission per unit sold 10 5 13 Variable manufacturing overhead 2400 1350 1300

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