Question 8 CVP analysis (10 marks) Softy Ltd specialises in toys for young children. It is going to produce a new cuddly toy bear called “Boftlie”. Boftlies will be sold for $30. Softy will have to buy a new industrial sewing machine costing $40,000 in order to manufacture the Boftlie. The machine will be fully depreciated in the first year. Other fixed costs of producing and marketing the Boftlie will be $500,000. The material and labour costs for each Boftlie come to $6. In addition, sales personnel will receive 20% commission on every Boftlie sold. Part A How many Boftlies must Softy sell to: 1.Break-even? (4 marks)
2.Earn a target operating profit of $150,000 assuming no taxes? (1 mark)
3.Earn a target after-tax operating profit of $150,000 assuming the company has a 25% tax rate? (2 marks)
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Part B Softy is considering buying a more expensive sewing machine, which costs $70,000 (instead of the $40,000 one). The machine will be fully depreciated in the first year. The new machine will cut labour and material costs down to $5 per Boftlie. All other variables will remain the same, i.e., other fixed costs are still $500,000, the price is still $30, and commission is still 20% Calculate the break-even under this scenario. (2 marks).
Part C Do you think Softy should buy the cheaper or more expensive sewing machine? Explain your answer. (1 mark)
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MCQ practice questions
You have seen samples of MCQ in the lectures and in your quiz attempts.
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