ECR Exam

Hey

I am practising ECR as i failed the 2nd half in December last year,

I have come to Task 2.2 on the Dec 07 paper, and come to a halt!

I am struggling with how to work out the budjeted break even sales, which is my anser for the second part of the task.
I have had a peep at the answers, but i do not understand where they have the £0.38 figure from.

Please help!!!

Thanks
Jackie

Comments

  • Richard
    Richard Registered Posts: 373
    Break-even = Fixed costs / contribution (per unit)

    In the question that you are doing, the fixed costs are 2,300 (700 + 1,600).

    The contribution is the sales price less variable costs, therefore,

    £0.88 (sales price) less £0.38 (1,200 + 1,000 + 1,600 = 3800 / 10,000) = £0.50

    So, breakeven = 2,300 / 0.50 = 4,600 units
  • jackiepowell
    jackiepowell Registered Posts: 72 ? ? ?
    thanks for that Richard
    A HUGE help...

    2.4 on the same paper, is that short term decisons?

    Thanks again
    Jackie
  • Richard
    Richard Registered Posts: 373
    Yes, its dealing with limiting factors - you are having to make a decision on how to maximise your profits when you don't have the capacity to produce enough to meet demand.

    You need to calculate which product will give the higher contribution, and prioritise production on that basis. In 2.4 product S782 will give you a contribution of £200, and S893 will only give you £120, so you would rank S782 as 1, and S893 as 2.

    You have the machine hours available to produce the full demand of S782, but you only have 2,000 hours left to produce S893, which means not enough will be produced to meet demand.

    Had you have used all of your resources into producing S893, in favour of S782, you would have had a lower profit.
  • SandyHood
    SandyHood Registered, Moderator Posts: 2,034
    For the benefit of other students attempting ECR this June, Jackie's question says
    Solvent S468 will be sold for £0.88/litre at the budgeted 10,000 litres activity level
    Task 2.2
    (a) Calculate the budgeted break-even sales in litres, for this solvent


    In task 2.1 there is enough information to enable you to identify the variable cost per litre:
    Variable cost..........................per litre
    Direct materials.......................£0.12
    Direct labour...........................£0.10
    Overheads..............................£0.16
    Total variable cost...................£0.38

    We know the selling price per litre is ....£0.88
    and the total variable cost per litre is ..£0.38
    So the contribution per litre is ............£0.50

    Breakeven in units (in this case litres) is found by identifying how many £0.50s there are in the total fixed costs.

    Fixed costs...............£
    Indirect labour.........700
    Fixed overheads....1,600
    Total fixed costs ..2,300

    Total fixed costs ...............£2,300
    Contribution per litre............£0.50

    Breakeven 4,600 litres
    Sandy
    [email protected]
    www.sandyhood.com
  • jackiepowell
    jackiepowell Registered Posts: 72 ? ? ?
    Thanks again for coming back to me Richard

    I am still really confused! Where have you got the 200 for S782 and 120 for S893 from!

    I am stuck with how to work the whole thing out.

    Thanks
  • Richard
    Richard Registered Posts: 373
    Thanks again for coming back to me Richard

    I am still really confused! Where have you got the 200 for S782 and 120 for S893 from!

    I am stuck with how to work the whole thing out.

    Thanks

    It is the contribution per machine hour.

    The first row of the table is the Contribution per thousand litres (£) - contribution is Sales less Variable (Marginal) Costs, therefore, the first answer is 400 (1,200 selling price less 800 marginal cost).

    We also know from the data available that 2 hours are required to produce 1000 litres, so the contribution per hour is 400 divided by 2. This gives the 200 for S782.

    For product S893, contribution is 600 (1600 - 1000), hours per '000 is 5, so 600 / 5 = 120.

    As product S782 gives the higher contribution per hour it will be ranked as '1'.

    There are 6000 machine hours available.

    Demand (in thousand litres) for S782 is 2,000 and 2 hours are required per thousand. 2,000 x 2 = 4,000 hours are needed in total to produce demand.

    This leaves 2,000 machine hours available for product S893, and as 5 hours are required per thousand, only 400 thousand litres can be produced.

    Total contribution earned is the production x contribution per thousand, so for S782 it will be 2,000 litres x £400 = 800,000.

    S893 will be 400 litres x £600 = 240,000.

    800,000 + 240,000 = 1,040,000 less 640,000 fixed costs (taken from data table) will produce a profit of £400,000 .
  • any2002uk
    any2002uk Registered Posts: 88 ? ? ?
    I am very confuse and stuck with Machine hours allocated.
    As Richard said demand 2000x2 = 4000. that is okay but where do we get 400 from and how did you calcuate it?

    i tried to get 400 appears on my calculate but so far failed!

    i though 2000 x 5 = 10,000 but it is not match 400!
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