Nungu Holdings (Pty) Ltd is a company registered and domiciled in the Republic of South Africa. The company manufactures running shoes, which are bought and mainly used for sporting and leisure activities. The Marketing Director has completed a review, and given you proposals for you to evaluate and make recommendations, together with the profit and loss statement for the year ended 28 February 2018: R'000 R'000 R'000 Sales revenue (100 000 pairs of shoes) 20 000 Factory costs for goods sold: (14 600) Direct material 2 000 Direct labour 7 000 Variable factory overheads 1 200 Fixed factory overheads 4 400 Administration overheads (fixed) (2 800) Selling and distribution overhead: (2 200) Sales commission (2% of sales) 400 Delivery costs (variable per unit sold) 1 000 Fixed costs 800 (19 600) Profit 400 The information to be submitted to the manging director includes the following two proposals: i. To proceed on the basis of the market research studies which indicate that the demand for the shoes is such that a 10% reduction in selling price would increase demand by 40%; ii. To proceed on the basis of a view by the marketing director that a 10% price reduction together with a national advertising campaign costing RO.6million may increase sales to the maximum capacity of 160 000 pairs of shoes. Required: Prepare the following: a) A financial evaluation of proposal (), and a calculation of the total number of units that Nungu Holdings (Pty) Ltd would have to sell (at the proposed reduced price) in order to earn a target profit of R1.6million. (Hint calculate the overall profit and number of units that the company would have to sell in order to achieve the target profit). b) A financial evaluation of proposal (ii)
Nungu Holdings (Pty) Ltd is a company registered and domiciled in the Republic of South Africa. The company manufactures running shoes, which are bought and mainly used for sporting and leisure activities. The Marketing Director has completed a review, and given you proposals for you to evaluate and make recommendations, together with the profit and loss statement for the year ended 28 February 2018: R'000 R'000 R'000 Sales revenue (100 000 pairs of shoes) 20 000 Factory costs for goods sold: (14 600) Direct material 2 000 Direct labour 7 000 Variable factory overheads 1 200 Fixed factory overheads 4 400 Administration overheads (fixed) (2 800) Selling and distribution overhead: (2 200) Sales commission (2% of sales) 400 Delivery costs (variable per unit sold) 1 000 Fixed costs 800 (19 600) Profit 400 The information to be submitted to the manging director includes the following two proposals: i. To proceed on the basis of the market research studies which indicate that the demand for the shoes is such that a 10% reduction in selling price would increase demand by 40%; ii. To proceed on the basis of a view by the marketing director that a 10% price reduction together with a national advertising campaign costing RO.6million may increase sales to the maximum capacity of 160 000 pairs of shoes. Required: Prepare the following: a) A financial evaluation of proposal (), and a calculation of the total number of units that Nungu Holdings (Pty) Ltd would have to sell (at the proposed reduced price) in order to earn a target profit of R1.6million. (Hint calculate the overall profit and number of units that the company would have to sell in order to achieve the target profit). b) A financial evaluation of proposal (ii)
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:-CVP ANALYSIS
Nungu Holdings (Pty) Ltd is a company registered and domiciled in the Republic of South Africa. The company
manufactures running shoes, which are bought and mainly used for sporting and leisure activities. The Marketing Director
has completed a review, and given you proposals for you to evaluate and make recommendations, together with the profit
and loss statement for the year ended 28 February 2018:
R'000
R'000
R'000
Sales revenue (100 000 pairs of shoes)
20 000
Factory costs for goods sold:
(14 600)
Direct material
2 000
Direct labour
7 000
Variable factory overheads
1 200
Fixed factory overheads
4 400
Administration overheads (fixed)
(2 800)
Selling and distribution overhead:
(2200)
Sales commission (2% of sales)
400
Delivery costs (variable per unit sold)
1 000
Fixed costs
800
(19 600)
Profit
400
The infomation to be submitted to the manging director includes the following two proposals:
To proceed on the basis of the market research studies which indicate that the demand for the shoes is such that a
10% reduction in selling price would increase demand by 40%;
To proceed on the basis of a view by the marketing director that a 10% price reduction together with a national
advertising campaign costing RO.6million may increase sales to the maximum capacity of 160 000 pairs of shoes.
Required:
Prepare the following:
a) A financial evaluation of proposal (), and a calculation of the total number of units that Nungu Holdings (Pty) Ltd
would have to sell (at the proposed reduced price) in order to earn a target profit of R1.6million. (Hint calculate the
overall profit and number of units that the company would have to sell in order to achieve the target profit)
b) A financial evaluation of proposal (i)
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