Question 1 - Woods plc

Solution

1. Breakeven point
SQ - VQ -F = 0
Variable costs = 45 + 35 + 30 + 8 = 118

180Q - 118Q = 350,000

62Q = 350,000
Q = 350,000 / 62
· Breakeven quanity = 5,646
· Sales revenue = 5,646 x £180 = £1,016,280

2. Margin of safety
Sales target = 30,000
Breakeven sales = 5,646
· Margin of safety = 24,354 units
· Margin of safety revenue = 24,354 x £180 = £4,383,720
· % Margin of safety = 24,354 / 30,000 = 82%
Question 2 - Fairytale Holidays Ltd
Solution

1. a) Breakeven
Revenue = 1,000 x 8% = £80 per ticket
Variable costs = 35 per ticket
Contribution per ticket = £80 - £35 = £45
Fixed costs = £23,000
Q = F/C
Q = 23,000 / 45
Breakeven quantity = 512 tickets

b) Target profit of £10,000

Q = (F + P) /C
Q = 23,000 + 10,000 / 45
Number of tickets to be sold = 734

2. a) Breakeven
New contribution = £80 - £29 = £51
Q = F/C
Q = 23,000 / 51
Breakeven quantity = 451 tickets

b) Target profit of £10,000

Q = (F + P) / C
Q = 23,000 + 10,000 / 51
Number of tickets to be sold = 648
Question 3 - Goldilocks Ltd
Suggested Solution

Workings

Sales 2,400
price 280
672,000

Contribution 280 x 45% = 126

Variable cost 280 - 126 = 154

Discount sales price = 280 * 80% = 224

New contribution = 224-154 = 70
Additional sales = 2,400 * 250% = 6,000
Additional fixed costs = 540,000

Incremental profit/loss

Note -as the normal fixed costs would appy to both scenarios, we can ignore them
(as we do not know how much they are)
With promotion Without promotion
New contribution 70 Contribution 126
Units per week 6,000 Units per week 2,400
420,000 302,400
No weeks 4 No weeks 4
Total contribution 1,680,000 Total contribution 1,209,600

Fixed costs 540,000

1,140,000

Without promotion 1,209,600

With promotion 1,140,000 The promotion results in a reduction in profits of
69,600 69,600

% increase in sales

Normal contribution 1,209,600

Additional fixed costs 540,000
Target profit 1,749,600
New contrib. per unit 70
Number of units 24,994 = 1,749,600 / 70
No. of weeks 4
Target sales per week 6,249

% increase in sales = (6,249-2,400 / 2,400) * 100 = 160.4%

Other factors
The impact of the promotion on sales of other products and product ranges during and
after the promotion
The effect of the promotion on sales of 'Just right' after the promotion period.
ignore them

n profits of
Question 4 - Mummy & Baby plc
Solution

Current position
Sales 1,000,000 / 50,000 = 20 per unit

Direct materials 350,000 / 50,000 = 7 per unit

Direct Wages 200,000 / 50,000 = 4 per unit
Variable overhead 50,000 / 50,000 = 1 per unit

£
Sales 20
Direct materials (7)
Direct Wages (4)
Variable overhead (1)
Contribution per unit 8

Fixed costs £
Fixed overhead 200,000
Admin expenses 180,000
Selling & Distribution 120,000
500,000

Breakeven point
500,000 / 8 62,500 units

Current loss
As per question 100,000

Proposal A

10% of sales = £2 so contribution decreases to £6 per unit

Breakeven = 500,000 / £6 = 83,333

Would need to increase sales to 83,333 units which is a 33,333 / 50,000 = 67% increase
This seems unlikely!

If this proposal achieved its aim, profit would be £0, but if sales volume stayed the same,
the loss would be increased to 33,333 * £6 = £200,000.

Proposal B

Sales reduced to £18 per unit so contribution per unit also decreased to £6 per unit.
Sales volume increased by 30% = 50,000 * 130% = 65,000
New contribution = 65,000 * £6 = £390,000
Fixed costs = £500,000 - £390,000 = £110,000 loss.

This proposal leads to a greater loss than is currently being achieved!

Proposal C

Wages increase by 25%. £200,000 * 125% = £250,000

Fixed costs increase to £550,000.
Volume increases by 20% = 50,000 * 120% = 60,000

Sales 1,200,000
Direct materials 420,000
Direct Wages 250,000
Variable overhead 60,000
730,000
Contribution 470,000
cpu = 470,000 / 60,000 = 7.833
Fixed costs 550,000
(80,000)

This is an improvement on the current loss of £100,000 but not enough to breakeven.
Breakeven point = 550,000 / 7.833 = 70,216

Proposal D
New sales price = £20 * 120% = £24
Profit margin = 10% of sales = £2.40 per unit
New contribution per unit = £12 New variable costs per unit = £12
Fixed costs = £500,000 + £300,000 = £800,000.
Q = target sales volume

24Q - 12Q - 800,000 = 2.4Q

24Q - 12Q = 800,000 + 2.4Q
12Q - 2.4Q = 800,000
9.6Q = 800,000
Q = 800,000 / 9.6
Q = 83,333
£000
Sales 2,000
Variable cost 1,000
Contribution 1,000
Fixed costs 800
Operating Profit 200

Operating profit margin 10%

In order to achieve a 10% profit margin, 83,333 buggies would have to be sold
That is an increase of 67% but is accompanied by a huge increase in advertising.

To breakeven, we would have to sell 800,000 / 12 = 66,667 buggies.

•Reducing material, energy and water usage should not only reduce environmental impact, it could
•Focus on reducing waste could, in turn, improve process efficiency, and reduce the amount (and th
ental impact, it could also reduce operating costs.
ce the amount (and therefore the cost) of materials used.
Question 5 - Porridge & Chairs plc
Solution

Current position

Sales 1,000,000 / 10,000 = 100

Direct materials 100,000 / 10,000 = 10

Direct labour 350,000 / 10,000 = 35
Variable overheads 60,000 / 10,000 = 6
Sales commission 2% * 100 = 2
Delivery costs 50,000 / 10,000 = 5
58

Contribution per unit 42

Fixed costs
Fixed overheads 220,000
Administration 140,000
selling & Distribution 40,000
400,000

Current breakeven 400,000 / 42 = 9,524 beds

Sales value 9,524 * 100 = 952,400

Proposal A

10% reduction in sales price = 90% * 100 = £90

Reduction in sales commission = 2% * £90 = £1.80

New cpu = 90 - 57.8 = £32.20

Demand increased by 40% = 10,000 * 140% = 14,000

Profit earned
Total Contribution £32.2 * 14,000 = 450,800
Fixed costs 400,000
50,800

This doesn't reach the target profit of £80,000

Shortfall is 80,000 - 50,800 = 29,200
Equivalent to 29,200 / 32.2 = 907 beds
Total beds + Profit shortfall = 14,000 + 907 = 14,907 beds
OR
No. of beds required to make £80,000 profit =
32.2Q - 400,000 = 80,000
32.2Q = 480,000
Q = 480,000 / 32.2
Q = 14,907
Proposal B

Workings
No delivery charge and no sales commission. Extra packing of £5 per bed.
New variable cost = 10+35+6+5 = 56 per unit
New fixed costs = 60,000

Target sales price to break even

£
Variable cost 5,000 beds * £56 = 280,000
Fixed cost 60,000
340,000
No beds 5,000
price per bed 68

Target sales price to achieve same profit as A

£
Variable cost 5,000 beds * £56 = 280,000
Fixed cost 60,000
Profit 50,800 - 20,000 30,800
370,800
No beds 5,000
price per bed 74

Target sales price to achieve target profit

£
Variable cost 5,000 beds * £56 = 280,000
Fixed cost 60,000
Profit 80,000 - 20,000 60,000
400,000
No beds 5,000
price per bed 80

Proposal C

New sales price = £90

New fixed cost = 30,000 = total fc of £430,000
New volume = 16,000

10% reduction in sales price = 90% * 100 = £90

Reduced sales commission = 2% * £90 = £1.80

New cpu = 90 - 57.8 = £32.20

Breakeven = 430,000 / 32.2 = 13,354 beds

surplus = 16,000 - 13,354 = 2,646 * £32.2 = £85,201 profit

This proposal results in a profit which exceeds target by £5,200.

 Break-even point = Fixed Cost/Contribution per unit

Notes:
Budget is 40,000 units 40,000
If any proposal goes above 42,000 reduce materials cost by 10%.
Factory capacity is 50,000 and cannot be exceeded. 50,000

Budget information In total Per unit

£ £ £ £
Sales 400,000 10.00
Variable materials 48,000 1.20
Variable labour 42,000 1.05
Variable factory overhead 32,000 0.80
Variable selling 58,000 1.45
180,000 4.50
Contribution 220,000 5.50

Fixed factory overhead 54,000

Fixed selling & marketing costs 25,000
Fixed administration costs 53,000
Total Fixed Costs 132,000 check
Net profit 88,000 -
Breakeven revenue 240,000

Breakeven units = FC/CPU 132,000 5.50 24,000

units

Summary Budget Proposal A Proposal B Proposal C

Contribution per unit 5.50 5.33 4.62 3.62

Profit 88,000 33,180 102,350 69,000
Breakeven (units) 24,000 39,775 22,846 30,939
Breakeven (revenue) 240,000 397,749 205,617 247,514

Proposal B would appear to be the best option in terms of profitability, breakeven units and breakeven revenue

Qualitative factors for the company to consider

Any type of promotion might generate sales beyond the coming year - analysis has only looked at the short term.
Any price reductions in proposals 2 and 3 might spark a price war with competitors.
Price reductions might make customers think the product has reduced in quality and the expected volume increases may not occur.
The last proposal involves the company working at full capacity and cost structures might then change.

•Reducing material, energy and water usage should not only reduce environmental impact, it could also reduce operating costs.
•Focus on reducing waste could, in turn, improve process efficiency, and reduce the amount (and therefore the cost) of materials used.