Reference no: EM132380380
Question
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 $350 000 Variable $600 000 Total $950 000 Cost of Sales( includes manufacturing costs) Selling, Marketing and Distribution Expenses General and Administrative Expenses 108 000 36 000 144 000 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?
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