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Target Ltd. has prepared three forecasted demand quantities for the next period for a patio...

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Accounting

Target Ltd. has prepared three forecasted demand quantities for the next period for a patio cleaning solution. The original budget was to produce 5,000 litres and the manufacturing cost per litre per of the product as follows: period in addition to other two levels of demand 7,000 and 9,000 litres.

Number of Litres

5,000

Costs

Variable costs

Direct materials

600

Direct labour

500

Overheads

800

Fixed costs:

Indirect labour

350

Overheads

800

Total cost

3,050

Cost per litre

0.61

Required

a) Estimate the manufacturing cost per litre of the product at the other two levels of demand 7,000 and 9,000 litres.

(10 marks)

b) Explain why the cost per litre of the product changes with the increase in the number of litres made.

(5 marks)

c) The cleaning product will be sold for 1.00/litre at 5,000 litres activity level.

Calculate the budgeted break-even sales, in litres, for this product and the margin of safety in percentage if the budgeted sales is 7,000 litres.

(5 marks)

d) In order to have reliable results from Break-even analysis, few assumptions must be met. Evaluate and discuss those assumptions.

(5 marks)

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