Problem:
Calculation of break-even points and limiting factor decision-making
You are employed as an accounting technician by Smith, Williams and Jones, a small firm of accountants and registered auditors. One of your clients is Winter plc, a large department store. Judith Howarth, the purchasing director for Winter plc, has gained considerable knowledge about bedding and soft furnishings and is considering acquiring her own business.
She has recently written to you requesting a meeting to discuss the possible purchase of Brita Beds Ltd. Brita Beds has one outlet in Mytown, a small town 100 miles from where Judith works. Enclosed with her letter was Brita Beds' latest profit and loss account. This is reproduced below.
Brita Beds Ltd
Profit and loss account - year to 31 May
|
Sales
|
(units)
|
|
|
Model A
|
1620
|
336960
|
|
Model B
|
2160
|
758160
|
|
Model C
|
1620
|
1010880
|
|
Turnover
|
|
2106000
|
|
Expenses
|
(£)
|
|
|
Cost of beds
|
1620 000
|
|
|
Commission
|
210 600
|
|
|
Transport
|
216 000
|
|
|
Rates and insurance
|
8 450
|
|
|
Light heat and power
|
10 000
|
|
|
Assistants' salaries
|
40 000
|
|
|
Manager's salary
|
40 000
|
2145050
|
|
Loss for year
|
|
39050
|
Also included in the letter was the following information:
1 Brita Beds sells three types of bed, models A to C inclusive.
2 Selling prices are determined by adding 30% to the cost of beds.
3 Sales assistants receive a commission of 10% of the selling price for each bed sold.
4 The beds are delivered in consignments of 10 beds at a cost of £400 per delivery. This expense is shown as 'Transport' in the profit and loss account.
5 All other expenses are annual amounts.
6 The mix of models sold is likely to remain constant irrespective of overall sales volume.