Bellona Ltd is a small business that produces a single product – a thermostat that is used in a range of kitchen appliances. Information relating to the thermostat is as follows:

All sales are made to kitchen goods manufacturers on credit. Bellona Ltd divides its customers into three separate categories with each having the following characteristics:

A new chief executive is concerned that sales have shown no significant growth for several years and is considering launching a marketing campaign to address the problem. A firm of marketing consultants has suggested that a focused campaign costing £0·80 million would increase sales revenue by £4·00 million. The business has sufficient spare capacity to accommodate this increase in sales.

It is predicted that the increased sales would be distributed among the different categories of customers as follows:

Bellona Ltd has an overdraft on which it pays 10% interest per year.

Required:

(a) Calculate the effect on the profit of Bellona Ltd of launching the marketing campaign and briefly comment on the results. (Workings to nearest £000)

(b) Explain why the management of trade credit can be a particular problem for small businesses such as Bellona Ltd.

Transcribed Image Text:

Per thermostat Selling price Material costs Variable labour costs Fixed costs apportionment Profit CH 10.00 (4-50) (2.50) (2.00) 1.00