Find the margin of safety in sales value.

Jamaa Company Ltd manufactures and sells a single product. The following information regarding the company’s operations for the year ended 30 September 2020 was presented to you.

 

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Profit and loss account for the year ended 30 September 2020

 

    Frw’000 Frw’000
Sales     30,000
Less:      
  Production costs    
  Direct material 6,500  
  Direct labour 5,400  
  Production overhead variable 7,000  
  Prime costs   18,900
      11,100
  Other expenses:    
  Selling – Variable 2,600  
  – Cost 1,997  
  Administration 2,100 6,697
  Net profit   4,403

 

The following changes are expected to occur during the year ending 30 September 2021:

 

1. Selling price will be adjusted downward by 3% in order to attract more customers.

2. Material prices will rise by 2% due to inflation.

3. There will be a reduction in labour cost of 4%.

4. Production overheads will increase by 3%.

5. Increase in the efficiency of sales persons will reduce direct selling costs by 5%.

All other factors are expected to remain constant.

 

Required:

a) Break-even point in sales value (2 Marks)

b) The margin of safety in sales value (2 marks)

c) The sales value at which profit of shs. 4.5 million will be achieved (2 marks)

A summary operating statement that shows the net profit of Shs.4.5 million in (c) above.

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