Reference no: EM132373404

Case Study

Breakeven analysis for Faux Beauty Ltd, a luxury cosmetics manufacturer

Faux Beauty Ltd (FBL), located in Sydney, produces and sells luxury bathroom and spa products for 5* Hotels to use in their rooms and suites. The company has been producing these products for the Australian market for over 20 years and are considered leaders from both a quality and efficiency perspective by their customers.

Faux Beauty Ltd suffered a severe drop in sales and profit performance for the year ended 30 June 2019. This has been correlated to increased pressure from overseas competitors in the luxury spa cosmetic market.

The Income Statement revealed that net sales were $1 500 000 with a profit of $310 000. Unit sales were 300000, and total costs were $1 190 000. A breakdown of costs and expenses is presented below:

	Fixed		Variable		Total
Cost of Sales( includes manufacturing costs)	$350	000	$600	000	5950	000
Selling,           Marketing      and              Distribution Expenses	108	000	36	000	144	000
General and Administrative Expenses	72	000	24	000	96	000
Total	$530	000	$660	000	$1 190	000

In response to the bad result, the Operations Manager has formulated a number of options for the year ending 30 June 2020 to try and improve performance. Independent policy options being considered are set out below:

1. Update factory machinery and production methods to adjust the mix of fixed and variable cost of sales (which includes manufacturing costs) to 40% fixed and 60% variable.

2. Increase the selling price by 15%, with no changes to costs and expenses but unit sales will decrease by 10%.

3. Change the manner in which sales staff are remunerated. It is proposed to pay sales staff on the basis of a base salary of $32 000 plus a 5% commission on net sales. The current policy is to pay fixed total salaries of $105,000.

Required:

1. Using the information provided :

a) Prepare an income statement for the year ended 30 June 2019 showing contribution margin.

b) What is the company’s 2019 break-even point in units?

c) What is the company’s 2019 break-even point in sales dollars?

2. Calculate the break-even point and profit for each of the three (3) options being considered by management.

3. What option, if any, should be recommended to management to improve the profitability of Faux Beauty Ltd? Explain why you are recommending this option by critically evaluating each course of action.

4. What other factors should be considered?