Blusky Ltd, is an electronics company based in Oxford which manufactures top of the range IT products
Question:
Blusky Ltd, is an electronics company based in Oxford which manufactures top of the range IT products including laptops and tablets. With more and more purchases being made on-line, the company has decided to manufacture a new tablet which is capable of scanning any item (the actual item or image of the product) and then automatically search the market on-line for the best price for that item.
The production cost of each tablet are made up of £314 of direct material and £29.50 of variable overheads. The total annual fixed costs that can be associated with the production of this new tablet are estimated at £261,600.
The value of investment associated with the production of the new tablets is £2,700,000. The directors only consider taking on new projects if they produce a minimum return on investment of 8.5%. The company expects to sell annually 9,500 of these tablets at a price of £399 each. The maximum production capacity for this new tablet is 11,500 units per year.
Required:
- Calculate the company’s expected profit from these new tablets for the year and show whether this meets the minimum required return on investment.
- Calculate the company’s break-even point in number of tablets and in sales value. Explain what break-even point indicates.
- Calculate the margin of safety as a percentage of the expected level of sales, and briefly explain what this figure means
- By calculating the impact on profit, show which of the following two strategies, (if any), that the company is currently considering should be adopted:
- The sales director suggests decreasing the selling price by £15. This is expected to increase the quantity demanded by 26%.
- The marketing director suggests by spending £36,000 on a series of a marketing campaign and increasing the warranty period from one year to two years to stimulate sales. This strategy will add on average £14 to the total production cost of each tablet and is expected to increase quantity demanded by 30%.
- BH Ltd, a medium-sized retailer of computers, has proposed to buy 3,500 of these new tablets at a lower price than the current price of £399 to allow it to make a 6% gross profit on its sales.
- Using supporting calculations, suggest whether this order should be accepted. What would be the total profit of Blusky Ltd for the year if this order is accepted?
- At what price will the order by BH Ltd enable BluSky Ltd to increase its total profits for the year to achieve an overall return on investment (ROI) of 11%?
NOTE – [To answer part (e), you should assume that none of the two strategies in part (d) above has been adopted]
- Explain the main assumptions and limitations of breakeven analysis.
Intermediate Accounting
ISBN: 978-0132162302
1st edition
Authors: Elizabeth A. Gordon, Jana S. Raedy, Alexander J. Sannella