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.
(5marks)
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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