P Ltd manufactures a specialist photocopier. Increased competition from a new manufacturer has meant that P Ltd has been operating below full capacity for the last two years.

The budgeted information for the last two years was as follows:

There was no opening stock at the beginning of year 1.

Required:(a) Prepare the actual profit and loss statements for each of the two years using:

• absorption costing;

• marginal costing

(b) Calculate the budgeted break-even point in units and the budgeted margin of safety as a percentage of sales for year 1 and then again for year 2.

(c) Explain how the change in cost structure (as detailed in the budgeted information) has affected the values you have calculated in your answer to part (b).