Calculate the breakeven point in sales value and units of production.

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January 18, 2021
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January 18, 2021

a) BMK is a small company and it specializes in the assembly of bicycles. With the rising price of petrol, the company expects that more people are likely to change their mode of transport by abandoning motor vehicles in favor of bicycles. The company’s planning manager has informed you that the selling price per bicycle is shs 120,000 and the standard costs are: direct labour 21,000/=, direct materials 60,000/= and variable overheads are 9,000/=. Total fixed overheads amount to shs 3,600,000 per year.

Annual output is 3,000 bicycles which is 75% of production capacity. The planning manager further informs you that during the financial year beginning 1st July 2020, demand for the bicycles will justify increasing production at 100% capacity. As a result of this proposal, total fixed overheads will rise by shs 100,000. All other variable costs vary in direct proportion to production

Required

i) Calculate the breakeven point in sales value and units of production. (4 marks)

ii) State whether the company should increase capacity as proposed by the planning manager. Support your answer with an analytical statement(

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