A. Green Berhad distributes a single product Anggun with a selling price of RM10. There were no beginning or ending inventories. The company's most recent monthly contribution format income statement is given as below:

Sales : RM 60 000
Variable expenses :45 000
Contribution margin: 15 000
Fixed expenses : 18 000
Net operating loss: (3000)

Required:

i.Calculate the Green Berhad 's contribution margin ratio.

ii. Calculate the break-even point (BEP) in units and sales value for Anggun.

iii. In view of an increasing demand for Anggun, the unit sales of the product is expected to be increased by 10 percent and the fixed expenses were expected to be reduced by RM2,000. Prepare a new income statement for Green Berhad in order to calculate the company's expected net operating income.

1 answer

Let's tackle each of the required calculations one by one.

### i. Calculate the Green Berhad's contribution margin ratio.

The contribution margin (CM) ratio is calculated by dividing the contribution margin by sales.
\[ \text{Contribution margin ratio} = \frac{\text{Contribution margin}}{\text{Sales}} \]

Given:
\[ \text{Contribution margin} = RM 15,000 \]
\[ \text{Sales} = RM 60,000 \]

\[ \text{Contribution margin ratio} = \frac{15,000}{60,000} = 0.25 \text{ or } 25\% \]

### ii. Calculate the break-even point (BEP) in units and sales value for Anggun.

The break-even point in units is calculated by dividing the total fixed expenses by the contribution margin per unit. First, we need to determine the contribution margin per unit.

\[ \text{Selling price per unit} = RM 10 \]

The variable expenses are also calculated on a per unit basis. Given the total variable expenses:
\[ \text{Variable expenses} = RM 45,000 \]
\[ \text{Total units sold} = \frac{\text{Sales}}{\text{Selling price per unit}} = \frac{60,000}{10} = 6,000 \text{ units} \]

\[ \text{Variable expense per unit} = \frac{45,000}{6,000} = RM 7.50 \]

\[ \text{Contribution margin per unit} = \text{Selling price per unit} - \text{Variable expense per unit} = 10 - 7.50 = RM 2.50 \]

Now, we can calculate the break-even point in units:
\[ \text{Fixed expenses} = RM 18,000 \]

\[ \text{Break-even point in units} = \frac{\text{Fixed expenses}}{\text{Contribution margin per unit}} = \frac{18,000}{2.50} = 7,200 \text{ units} \]

To find the break-even point in sales value:
\[ \text{Break-even point in sales value} = \text{Break-even point in units} \times \text{Selling price per unit} = 7,200 \times 10 = RM 72,000 \]

### iii. Prepare a new income statement for Green Berhad assuming a 10% increase in unit sales and a reduction of RM 2,000 in fixed expenses.

**1. Calculate the new unit sales:**
\[ \text{Current unit sales} = 6,000 \text{ units} \]
\[ \text{New unit sales} = 6,000 \times 1.10 = 6,600 \text{ units} \]

**2. Calculate the new sales value:**
\[ \text{New sales value} = 6,600 \times 10 = RM 66,000 \]

**3. Calculate the new variable expenses:**
\[ \text{New variable expenses} = 6,600 \times 7.50 = RM 49,500 \]

**4. Calculate the new contribution margin:**
\[ \text{New contribution margin} = \text{New sales value} - \text{New variable expenses} = 66,000 - 49,500 = RM 16,500 \]

**5. Calculate the new fixed expenses:**
\[ \text{New fixed expenses} = 18,000 - 2,000 = RM 16,000 \]

**6. Calculate the new net operating income:**
\[ \text{New net operating income} = \text{New contribution margin} - \text{New fixed expenses} = 16,500 - 16,000 = RM 500 \]

Now, let's put this information into a new income statement:

\[
\begin{array}{l r}
\textbf{Green Berhad} & \\
\text{Income Statement} & \text{(Monthly)} \\
\hline
\text{Sales} & RM 66,000 \\
\text{Variable expenses} & (RM 49,500) \\
\hline
\text{Contribution margin} & RM 16,500 \\
\text{Fixed expenses} & (RM 16,000) \\
\hline
\text{Net operating income} & RM 500 \\
\end{array}
\]

So, the expected net operating income for Green Berhad, given the increased demand and reduced fixed expenses, is RM 500.