Reference no: EM132461608

Problem - Proctor & Livings Ltd produces chocolate bars throughout the year. For the last seven years since their establishment, their profits didn't materialise as hoped for. The CFO, Vincent Low, approaches you and asks you for your help. He provides you with a list of costs for an average month of chocolate bar production and you have been asked to examine the financial feasibility of the operation. Variable costs are calculated at an assumption of selling 35,000 chocolate bars per month. RM Materials: Butter 3,700 Chocolate 5,000 Depreciation 2,370 Direct labour 12,000 Milk 3,550 Power supply 11,000 Rates 600 Rent 2,000 Salaries 12,300 Sales commission 13,400 Heating and lighting includes a 25 percent fixed charge. The product is to be sold at RM2 per bar.

Required -

a) Calculate the break-even point for this product.

b) Calculate the margin of safety as a percentage of sales units.

c) What is the profit / (loss) at a sales volume of 50,000 units.

d) Accurately draw a graph showing the following: i. Fixed costs ii. Total variable costs iii. Total costs iv. Total revenue v. Break-even point vi. Margin of safety.

e) In this company's business proposal they have stated their aim is to achieve a yearly ROCE of 5%, their initial capital was RM3,000,000. How many units of their product need to be sold monthly to achieve this ROCE target? What does your answer tell you?

f) Based on your answers for a) and b), how does the break-even point and the MOS change if the company decides to increase their price by 15%, which in turn would lead to a reduction in units sold by one third.

g) Describe the limitations of the Break-Even method and elaborate why it might be difficult for a company with three products to apply this approach.