QUESTION 1
Liswaniso Furniture Ltd produces and sells chairs. The company sells the chairs at an average price of K610 to both individual and corporate customers. Its current machines were purchased twenty (20) years ago and as a result some of the products produced are of poor quality. The current rate of rejects (i.e. products of unacceptable quality) is 10%.
Liswaniso Furniture Ltd is now considering replacing the machines with more technically advanced ones, which would eliminate rejects altogether. The company’s standard costs for one chair are as follows:
K K
Direct material
Wood 80
Fabric 60
140
Direct labour 100
Variable overheads 200
Cost per unit produced 440
Cost of rejects 44
Variable cost per unit sold 484
Currently, the company sells 2,250 chairs per annum. The company’s fixed overheads are K17,500 per month.
If the new machines were hired to replace the old machines, fixed costs would increase by K2,500 per month. However, the new machines would reduce variable overheads by 15%. The fabric usage by the new machines will result in a 12% decrease in the fabric cost.
Required:
(a) Calculate the current annual break-even point in units and revenue.
(b) Calculate the annual break-even sales revenue if the new machines are used.
(c) Calculate the annual number of chairs that would have to be produced and sold for Liswaniso
Furniture to become indifferent about using the old or the new machines.
(d) Explain any three (3) limitations of the Cost-Volume-Profit model.
QUESTION 1 Liswaniso Furniture Ltd produces and sells chairs. The company sells the chairs at an average price of K610 to both individual and corporate customers. Its current machines were purchased twenty (20) years ago and as a result some of the products produced are of poor quality. The current rate of rejects (i.e. products of unacceptable quality) is 10%. Liswaniso Furniture Ltd is now considering replacing the machines with more technically advanced ones, which would eliminate rejects altogether. The company’s standard costs for one chair are as follows: K K Direct material Wood 80 Fabric 60 140 Direct labour 100 Variable overheads 200 Cost per unit produced 440 Cost of rejects 44 Variable cost per unit sold 484 Currently, the company sells 2,250 chairs per annum. The company’s fixed overheads are K17,500 per month. If the new machines were hired to replace the old machines, fixed costs would increase by K2,500 per month. However, the new machines would reduce variable overheads by 15%. The fabric usage by the new machines will result in a 12% decrease in the fabric cost. Required: (a) Calculate the current annual break-even point in units and revenue. (b) Calculate the annual break-even sales revenue if the new machines are used. (c) Calculate the annual number of chairs that would have to be produced and sold for Liswaniso Furniture to become indifferent about using the old or the new machines. (d) Explain any three (3) limitations of the Cost-Volume-Profit model.