Polemic Ltd manufacture and sell a single product. The following information is available for three financial years

Question:

Polemic Ltd manufacture and sell a single product. The following information is available for three financial years ending 30 September.

Additional information:

1. When the management of Polemic prepared its direct labour forecast unit cost for 19X2 and 19X3, direct wages were increased only by the forecast rate of inflation.

2. The trade union representatives of the production workers wished to press for a greater wage increase. They suggested that:

(i) Direct wages be increased at twice the rate of inflation. The effect of this would be to increase direct labour costs per unit as follows:

(ii) Unit selling prices be increased in order to cover the increased labour costs.

3. It is to be assumed that all expense and revenue relationships will be unchanged except where indicated.


Required:

(a) A schedule for 19X1, 19X2 and 19X3 for Polemic Ltd showing:

(i) the break-even points;

(ii) the net profit for each year. Base your calculations on the original labour costs.


(b) A graph showing a break-even point for 19X2.

(c) Advise Polemic Ltd’s management as to their response to the trade union’s claim for higher wages. Include relevant financial analysis.

(d) Explain the limitation of break-even analysis.

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