Question:
A summary of a manufacturing company's budgeted profit statement for its next financial year, when it expects to be operating at 75 per cent of capacity, is given below.
|
|
£
|
£
|
|
Sales 9,000 units at £32
|
|
288,000
|
|
Less:
|
|
|
|
direct materials
|
54,000
|
|
|
direct wages
|
72,000
|
|
|
production overhead - fixed
|
42,000
|
|
|
- variable
|
18,000
|
|
|
|
|
186,000
|
|
Gross profit
|
|
102,000
|
|
Less: admin., selling and dist'n costs:
|
|
|
|
- fixed
|
36,000
|
|
|
- varying with sales volume
|
27,000
|
|
|
|
|
63,000
|
|
Net profit
|
|
39,000
|
It has been estimated that:
(i) if the selling price per unit were reduced to £28, the increased demand would utilize 90 per cent of the company's capacity without any additional advertising expenditure;
(ii) to attract sufficient demand to utilize full capacity would require a 15 per cent reduction in the current selling price and a £5,000 special advertising campaign.
You are required to :
(a) calculate the breakeven point in units, based on the original budget;
(b) calculate the profits and breakeven points which would result from each of the two alternatives and compare them with the original budget.