Reference no: EM133079470

Question - Burning Desires Limited ("the Company") produces and sells a wood burning stove called the View Clear. The Company has been producing stoves for the British market for over 30 years and began exporting a limited number of stoves to Canada about 10 years ago. The Company is a subsidiary of a Chinese multinational that has not been satisfied with the losses that the Company has incurred over the last few years. The parent company in China is threatening to close the British factory unless the Company can produce a profit in the next year of operation. The factory currently has a capacity to produce 50,000 stoves per year but all realistic estimates of its market size, including the exports to Canada, suggest that it will not sell more than 30,000 stoves per year in any of the next 5 years.

The managing director has hired you to find ways to improve profitability. You analyse the cost structure of the Company and find the following:

Production costs:

Variable - GHS 1,150 per stove

Fixed - GHS 2,500,000 for 30,000 stoves.

Selling and administrative expenses:

Variable - GHS 150 per stove

Fixed - GHS 1,800,000

During the year ended 30 September 2017, the Company sold 28,000 View Clear stoves for GHS 1,400 each.

Required -

i. Using the full-costing approach, prepare an income statement to ascertain profit for the period.

ii. Prepare an income statement for the year ended 30 September 2017 showing the total contribution.

iii. Explain the difference in net incomes (support your answer with relevant computation).

iv. Calculate the company's break-even point in units of stove and in sales revenue.

v. Determine the percentage drop in sales in order for the firm to begin to incur losses variably.

vi. Distinguish between product costs and period costs. You may give examples to illustration your answer.