Break-even chart with increases in fixed costs

(a) Identify and discuss briefly five assumptions underlying cost-volume-profit analysis. (10 marks)

(b) A local authority, whose area includes a holi- day resort situated on the east coast, operates, for 30 weeks each year, a holiday home which is let to visiting parties of children in care from other authorities. The children are accompanied by their own house mothers who supervise them throughout their holiday. From six to fifteen guests are accepted on terms of 100 per person per week. No differential charges exist for adults and children.

Weekly costs incurred by the host authority are:

Seasonal staff supervise and carry out the necessary duties at the home at a cost of 11000 for the 30-week period. This provides staffing sufficient for six to ten guests per week but if eleven or more guests are to be accommodated, additional staff at a total cost of 200 per week are engaged for the whole of the 30-week period. Rent, including rates for the property, is 4000 per annum and the garden of the home is maintained by the council's recreation department which charges a nominal fee of 1000 per annum. You are required to: (i) tabulate the appropriate figures in such a way as to show the break-even point(s) and to comment on your figures; (8 marks) (ii) prepare a chart to illustrate your answer to (b)(i) above. (7 marks)

Existing annual sales volume of the three products is:

If 60000 per annum was to be invested in advertising and sales promotion, sales of Product A at reduced selling prices would be expected to be: 590 000 units at 2.75 per unit or 650 000 units at 2.55 per unit Annual fixed costs are currently 1710000 per annum.

Required:

(a) Calculate the current break-even sales revenue of the business. (8 marks)

(b) Advise the management of Z Ltd as to whether the expenditure on advertising and promotion, together with selling price reduc- tion, should be introduced on Product A. (6 marks)

(c) Calculate the required unit sales of Product A, at a selling price of 2.75 per unit, in order to justify the expenditure on advertising and promotion. (5 marks)

(d) Explain the term 'margin of safety', with particular reference to the circumstances of Z Ltd. (6 marks)

Food Electricity for heating and cooking Domestic (laundry, cleaning etc.) expenses Use of minibus ( per guest) 25 3 5 10 10