The firm sells a wall mounted control unit for ‘Smart Home’ systems that provides connectivity to home devices (for home automation) priced at £400 of which product variable costs are half of revenues

ANSWER- A (i)

Selling Price Per Unit = £400

Variable cost per unit= (400÷2) = £200

Fixed overhead = £ 69000

Production Capacity = 20000 Units

Contribution statement

Sales = (units×selling price per unit)

Variable cost = (Units × Variable cost per unit)

Contribution = Sales - Variable cost

CONTRIBUTION IS A EXCESS OF SALES OVER VARIABLE COST. WHEN IT IS HIGH SO SHOWS FIRM'S STRONG POSITION.

ANSWER- A (ii)

Break-even analysis looks at the level of fixed costs relative to the profit earned by each additional unit produced and sold. In general, a company with lower fixed costs will have a lower break-even point of sale.

CONTRIBUTION PER UNIT = SELLING PRICE PER UNIT - VARIABLE COST PER UNIT

CONTRIBUTION PER UNIT = 400 - 200 = £ 200 CONTRIBUTION MARGIN RATIO = (CPU × 100)÷ SPPU

CONTRIBUTION MARGIN RATIO = (200×100)÷ 400 = 50%

Break even point in Units = FIXED COST ÷ CONTRIBUTION PER UNIT

BEP in Units = £690000÷200 = 3450 units

BEP in Amount = 3450×400 = £ 1380000

At 3450 Units level of sales firm has no profit no loss. Below the BEP LEVEL firm will bear the loss and above the level firm will earn profit.

ANSWER-A (iii)

Margin of safety at 6200 Units

Contribution - Fixed cost = Profit

( 6200 × 200 ) - £690000 = profit

£1240000 - £ 690000 = profit

£ 550000 = PROFIT

??????MARGIN OF SAFETY = ACTUAL SALES - BEP SALES

MARGIN OF SAFETY = (400 × 6200) - £1380000

MARGIN OF SAFETY = £2480000 - £ 1380000

Margin of safety = £ 1100000

it is the sufficient Margin of safety because it gives £ 550000 PROFIT.

ANSWER ( B )

if material price increases its results that contribution margin Ratio will be reduced to 1/3. So new contriContri margin ratio will be

= ( 50% ÷ 3 ) = 16.67% approx

New Break even point = ( Fixed cost × 100 ) ÷ Contribution margin Ratio

New Break even point = ( 690000×100 ) ÷ 16.67

New BEP = £ 4139972

New BEP in Units = ( £ 4139972 ÷ 400 ) = 10348 Units

Profit will be reduced because due to increased in raw material prices so it gives the bad impact on profitability position of the firm.

1. New BEP IS 10348 UNITS SO FIRM REQUIRED TO DECREASE IT OTHER VARIABLE COST SO FIRM'S BEP WILL GO DOWN.

2. THE OTHER HAND FIRM REQUIRED TO DECREASE IT'S FIXED COST ALSO

3. Firm should take remedies action to control the cost of Labour and other overhead cost.

4. Firm should try to reduce cost so it covers Increase in cost of raw material.

Thank you