Método de cálculo

sales revenue (at £20 each) 800,000

less variable costs (at £10 each) 400,000

equals contribution (to fixed costs and profit) 400,000

less monthly fixed costs 300,000

equals forecast profit for month 100,000

EMAIL To: General Manager

From: A2 Student Date: Today

Proposal to reduce selling price Introduction

• This report considers the suggestion from one of the managers that the selling price for our product should be reduced from £25 per unit to £20.

• The manager has suggested that the effect of this reduction would be to increase output from the forecast of 30,000 units per month to our maximum output of 40,000 units per month.

Report

• As can be seen from the workings at current levels of output of 30,000 units per month:

– contribution sales ratio is 60%

– break-even point is 20,000 units – margin of safety is 33.3%

– forecast profit is £150,000 per month

• If the manager’s suggestion is adopted sales will increase to our maximum output of 40,000 units per month; this will give us:

– contribution sales ratio of 50%

– break-even point of 30,000 units – margin of safety of 25%

– forecast profit of £100,000 per month

Conclusion

• From the data summarised above it can be seen that the manager’s suggestion would reduce our contribution sales ratio, increase the break-even point, and reduce the margin of safety. All of these are all movements in the wrong direction.

• The main point to note is that forecast profit will fall by £50,000 per month to £100,000 per month, and the volume of output will need to be higher.

• Although the firm would be working at maximum output if the suggestion is adopted, this does mean that there is no scope to increase output and sales in the future without major changes to our cost structure. We would not be able to meet requests for additional sales from our existing customers, and this could cause them to seek all of their supplies from our competitors.

• For these reasons, it is recommended that the manager’s suggestion is not undertaken.

11.5 (a)

Fixed costs Variable costs per

£ unit in pence

Wages 20

Raw materials 30

Salespeople’s wages 10

Administration costs 42,000

Business rates 20,400

Total £62,400 60p

(b) (i) Contribution per unit = selling price per unit – variable costs per unit (ii) Contribution per unit = £1.00 – £0.60 = £0.40

(iii) Contribution goes, firstly, towards fixed costs and, when they have been covered, secondly, contributes to profit

(c) (i) Break-even point (units) = fixed costs (£) contribution per unit (£)

= £62,400 = 156,000 bookmarks

£0.40

(ii) Total revenue = 156,000 bookmarks x £1 = £156,000

(iii) Sales of 150,000 bookmarks are 6,000 below break-even point.

There will be a loss of 6,000 x £0.40 contribution = £2,400

11.8 (a) A = margin of safety, between 3,500 and 6,000 carpets, ie 2,500 carpets B = area of loss

C = profit at maximum capacity of 6,000 carpets

D = sales value and total costs, £25,000, at break-even point

(b) Disadvantage of using a break-even graph to identify the break-even point, one from:

• the assumption is made that all output is sold

• the presumption is made that there is only one product

• all costs and revenues are expressed in straight lines

• it is not possible to extrapolate the graph

• the profit or loss shown by the graph is probably only true for figures close to current output levels

• external factors are not considered

11.9 (a) Marginal cost is the cost of producing one extra unit of output.

(b) Marginal cost per unit: £

materials (3 metres at £5 per metre) £15.00

labour (15 minutes at £12 per hour) 3.00

variable manufacturing overheads 3.00

marginal cost per unit 21.00

(c) Marginal cost x 1.2 = £21.00 x 1.2 = £25.20 selling price per unit

(d) Break-even in units:

fixed costs (£) = £52,500 = 12,500 units

contribution per unit (£) £25.20 – £21.00 Break-even revenue:

break-even units x selling price per unit = 12,500 units x £25.20 = £315,000

(e) Usefulness of break-even analysis in decision-making:

• Break-even is the point at which neither a profit nor a loss is made and tells a business the sales (in both units and revenue) that have to be made to meet costs.

• It provides:

– the profit or loss at any level of output/sales within the range of the analysis – the margin of safety, ie the amount by which sales exceed the break-even point

• It helps a new business to determine selling prices and can be used to support an application for finance.

• It can be adapted to take note of changes in costs and selling price.

• However, break-even analysis:

– assumes that all output is sold

– presumes that there is only one product

– all costs and revenues are expressed in straight lines – cannot be extrapolated

– the indicated profit or loss is probably only true for figures close to current output levels – does not take into account external factors

Conclusion: break-even analysis is useful for giving guidance to a business about individual products, but it does have a number of limitations.

11.11 (a) fixed costs (£) = break-even point (in units) contribution* per unit (£)

* selling price per unit – variable costs per unit

(b) (i) Year ended 30 November 2003:

£42,250 = 1,625 portraits

£38 – £12

(ii) Year ended 30 November 2004:

£52,000 = 2,000 portraits

£38 – £12

(c) • Increase in fixed costs: £52,000 – £42,250 = £9,750

• £9,750 ÷ 1,625 portraits at 2003 break-even = £6 extra per portrait

• Therefore the price of each portrait will need to increase by £6 to £44

(d) • The price change to £44 is a 16% increase

• As a result of the increase the demand for portraits may fall to below break-even point

• The prices charged by competitors may be below that charged by Tracey

• Tracey should investigate reducing her variable costs and/or see if the increase in fixed overheads can be reduced in any way.

12.1 (a) • cost units – units of output to which costs can be charged

• cost centres – sections of a business to which costs can be charged (b) Suggestions to include:

COST UNIT COST CENTRE

• firm of accountants client hour partner in firm

tax department administration

• parcel delivery company per parcel vehicle

per kg depot

per mile/kilometre head office per kg mile (or

kilometre)

• college of further education student hour teaching department learning resources administrative office

• mixed farm kg of wheat field

head of cattle cattle shed

12.2 Suggestions to include:

1. Sections of a theatre which could be used as cost centres:

Productions Bar

Confectionery

Printing and advertising (or marketing) Box office, stewarding and programme sales Administration

Maintenance and cleaning of buildings

2. Sections of a garage which could be used as cost centres:

New car sales Used car sales Repairs and servicing Valeting

Management and administration

12.4 • Marginal cost per barbecue £

Direct materials 30.00

Direct labour 25.00

MARGINAL COST 55.00

• Absorption cost per barbecue £

Direct materials 30.00

Direct labour 25.00

PRIME COST 55.00

Overheads (fixed) 150,000 ÷ 10,000 barbecues 15.00

TOTAL COST 70.00