Rennes Ltd provides a single standard service. The business’s results for the pa
ID: 2488088 • Letter: R
Question
Rennes Ltd provides a single standard service. The business’s results for the past two months are as follows: April May Sales (units of the service) 700 920 Sales revenue (£) 35,000 46,000 Operating profit (£) 18,000 27,800 There were no changes, of any description, in selling prices or costs over the two months. Required: 5a. Calculate sales price per unit. (1 points) 5b. Given the total cost and activity levels in terms of sales units per each month, identify variable and fixed cost using high-low method. (4 points) 5c. What is the break-even point for the business’s activities? (2 points) 5d What benefit will it be for the management of Rennes Ltd to know the business’s break-even point? (2 points) 5e. Calculate contribution margin ratio per unit and briefly explain what it means for Rennes Ltd (3 points) 5f. Calculate margin of safety for each month in units as well as percentage terms and briefly explain what it means for Rennes Ltd (3 points) (Total: 15 marks)Rennes Ltd provides a single standard service. The business’s results for the past two months are as follows: April May Sales (units of the service) 700 920 Sales revenue (£) 35,000 46,000 Operating profit (£) 18,000 27,800 There were no changes, of any description, in selling prices or costs over the two months. Required: 5a. Calculate sales price per unit. (1 points) 5b. Given the total cost and activity levels in terms of sales units per each month, identify variable and fixed cost using high-low method. (4 points) 5c. What is the break-even point for the business’s activities? (2 points) 5d What benefit will it be for the management of Rennes Ltd to know the business’s break-even point? (2 points) 5e. Calculate contribution margin ratio per unit and briefly explain what it means for Rennes Ltd (3 points) 5f. Calculate margin of safety for each month in units as well as percentage terms and briefly explain what it means for Rennes Ltd (3 points) (Total: 15 marks)Explanation / Answer
Solution.
5a. Calculate sales price per unit.
sales price per unit. = $35,000 / 700 = 50
= $46,000 / 920 = $50.
5b. Given the total cost and activity levels in terms of sales units per each month, identify variable and fixed cost using high-low method.
Fromula of high low method = Change in cost / Change in Unit.
= (18,200 - 17,000) / ( 920 - 700 )
= 1,200 / 220 = 5.45 per unit.
For april:
Total cost = Fixed cost + Variable cost
= 17,000 = Fixed cost + 700 x 5.45
= Fixed cost = 17,000 - 3,814
Fixed cost = $13,186
For may :
Total cost = Fixed cost + Variable cost
= 18,200 = Fixed cost + 920 x 5.45
= Fixed cost = 18,200 - 5,014
Fixed cost = $13,186
5c. What is the break-even point for the business’s activities.
Break-even poin = Fixed cost / Contribution margin.
= 13,186 / (31,186 / 35,000 )
= $14,800.
For May.
Break-even poin = Fixed cost / Contribution margin.
= 13,186 / (40,986 / 46,000 )
= $14,800.
5e. Calculate contribution margin ratio per unit and briefly explain what it means for Rennes Ltd .
Contribution margin ratio per unit = Contribution margin / sales unit
= $31,186 / 700 = $44.55
5f. Calculate margin of safety for each month in units as well as percentage terms.
Formula = (Current Sales Level – Breakeven Point) / Current Sales Level
For April.
= ( 35,000 - 14,800 ) / 35,000
= 57.71%
For May.
= ( 46,000 - 14,800 ) / 46,000
= 67.82%.
Particulars April May Sales 700 920 Sales revenue 35,000 46,000 Variable cost (3,814) (5,014) Contribution margin 31,186 40,986 Fixed cost (13,186) (13,186) Operating profit 18,000 27,800