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Finance

Finance and Accounting

Net profit for 20X1

Income Statement

For the year 20X1

Sales (20,000 units x \$ 25)

£500,000.00

Variable cost

Direct labour

£160,000.00

Direct materials

£65,000.00

£50,000.00

Total Variable Cost

£275,000.00

Contribution Margin

£225,000.00

Fixed Cost

Manufacturing

£15,000.00

Selling

£40,000.00

£70,000.00

Total Fixed costs

£125,000.00

Net Income

£100,000.00

Net Profit of Arntrecht Sleep Company for the year 20X1 is 100, 000.

Projected net profit for 20X2

Arntrecht Sleep Company

Income Statement

For the year 20X2

Sales (22,000 units x \$ 25)

£550,000.00

Variable cost

Direct labour

£176,000.00

Direct materials

£71,500.00

£55,000.00

Total Variable Cost

£302,500.00

Contribution Margin

£247,500.00

Fixed Cost

Manufacturing

£15,000.00

Selling

£51,250.00

£70,000.00

Total Fixed costs

£136,250.00

Net Income

£111,250

Projected net profit for 20X2 is £111,250when sales target for 20X2 at a level of £550,000 i.e. 22,000 units with additional expenses of £11,250 for advertising.

Break-even point in units and value for 20X2

Break Even Analysis 20X2

Break Even = Fixed Cost / (Selling Price - Variable Cost)

Fixed Cost

£136,250.00

Selling Price

£25.00

Variable Cost

£13.75

Break Even In units

12, 111

Break Even In Value

£302, 778

Breakeven point in 20X2 is 12,111 units while breakeven in value is £302,778.

Required sales level in terms of units to equal 20X1's net profit

In order to determine the required sales level in terms of units equals to 20X1 net profits, the following formula will be used (Ramsden, 2012).

Formula:

Sales = Variable expenses + Fixed expenses + Profit

S*Q = VC*Q + F.E + P

25Q = 13.75Q + £ 136,250 + £ 100,000

25Q - 13.75Q = £236, 250

11.25 Q = £236, 250

11.25 Q = £236, 250

Q = 236250/11.25

Q = 21, 000 units

Arntrecht Sleep Company

Income Statement

For the year 20X2

Sales (21,000 units x \$ 25)

£525,000.00

Variable cost

Direct labour

£168,000.00

Direct materials

£68,250.00

£52,500.00

Total Variable Cost

£288,750.00

Contribution Margin

£236,250.00

Fixed Cost

Manufacturing

£15,000.00

Selling

£51,250.00

£70,000.00

Total Fixed costs

£136,250.00

Net Income

£100,000.00

With 21, 000 units, Arntrecht Sleep Company sales level in terms of units will be equal to 20X1's net profit.

Maximum amount that can be spent on advertising at the sales level of 22,000 units if a net profit of £100,000 is to be achieved.

The maximum amount that can be spend on adverting at the sales level of 22,000 units, in order to achieve net profit of £100,000, following formula will be used (Bul, 2012).

Formula:

Sales = Variable expenses + Fixed expenses + Profit

S*Q = VC*Q + F.E + P

25 * 22,000 = 13.75 *22,000 + F.E+ £ 100,000

£ 550,000 = £ 302,500 + F.E + £ 100,000

£ 550,000 - £ 302,500 - £ 100,000 = Fixed Cost

£ 147, 500 = Fixed Cost

This is the total Fixed Cost which comprise of Manufacturing, Selling and Administration. Maximum amount that can be spent on advertising at the sales level of 22,000 units is £62,500.00.

Fixed Cost

Manufacturing

£15,000.00

Selling

£62,500.00

£70,000.00

Total Fixed costs

£147,500.00

a. Prepare a flexible budget covering the level of output - 460,000 units

Cost Item

Variable Cost Per Unit

Unit Level of Activity 400,000 460,000

Direct Material

0.29

115,000.00

135,000

Direct Labor

0.20

80,000.00

88,000

Direct expenses

0.15

60,000 70,000

Variable Factory - 70%

0.17

66500

73500

Variable Selling expenses - 80%

0.09

36000

43200

Total Variable Cost

0.89 357,500.00 409,700.00

Fixed Cost

Factory Expenses

28500

31500

Selling Expenses

9000

10800

50,000

51,000

Total Fixed Expenses

87500

93300

Total Cost

445,000 503,000

Sales at £1 per unit

400,000 468,000

b. Compute the variances

Budget

Actual

Variance

Items

£

£

Sales

400,000

468,000

Favorable

Cost of sales

255,000

293,000

Un-Favorable

Gross Profit

145,000

175,000

95,000

105,000

Un-Favorable

Net Profit

£50,000

£70,000

Favorable

Output (units)

400,000

460,000

Favorable

Cost of sales

Direct materials

£115,000

£135,000

Un-Favorable

Direct labour

80,000

88,000

Un-Favorable

Direct expenses

60,000

70,000

Un-Favorable

£255,000

£293,000

Un-Favorable

Selling expenses

45,000

54,000

Un-Favorable

50,000

51,000

Un-Favorable

£95,000

£105,000

Un-Favorable

Answer 3: Quick, Brown & Fox Ltd

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