Koru Fashions Company produces an outdoor jacket that sells for $126 with a variable cost per jacket of $90 and monthly fixed overheads of $118,800. Last month, Koru Fashions made a profit of $46,620. Required
accounting
Description
2. Cost-volume-profit analysis: 15 marks
Koru Fashions Company produces an outdoor jacket that sells for $126 with a variable cost per jacket of $90 and monthly fixed overheads of $118,800. Last month, Koru Fashions made a profit of $46,620. Required
(a) Calculate how many jackets Koru Fashions sold last month.
(b) Calculate the current breakeven point based on the last month’s cost structure.
(c) Koru Fashions is now planning operations for the remainder of this year. The sales manager is proposing to increase sales by reducing the selling price to $121 per jacket and spending an additional $14,000 per month on advertising. She estimates that sales volume would increase to 5,800 jackets per month.
(i) Calculate the breakeven point in unit and monthly profit based on the sales manager’s proposal.
(ii) Evaluate the sales manager’s proposal, taking into account the expected impact on profits and on the breakeven point. State any assumptions you need to make.
(d) If the managing director of Koru Fashions were to require that the future profits per month were 15% higher than last month’s profit. Calculate how many jackets have to be sold each month
(i) Assuming that the sales manager’s proposals were adopted.
(ii) Assuming that they were not (e.g., using the price and cost information from last month).
(iii) Comment on the results.
