Brandon's site opened last year & makes one high-quality product, the P100. The management accountant has just prepared the first draft of next year's budget (see below) and she predicts a £20,000 loss.

 

Brandon Ltd - Budgeted Profit & Loss Statement 2021

Budgeted number of units	10,000
Sales Revenue(£120/unit)	£1,200,000
Less Variable Costs
Materials (£40/unit)	£400,000
Labour (£20/unit)	£200,000
Contribution(£60/unit)	£600,000
Less Fixed Costs	£620,000
	(£20,000)

 

The Directors believe that it is vital for the Company to at least breakeven and would like to aim for a profit of £25,000. To achieve this, the Managing Director has generated two ideas to discuss at the next board meeting.

 

Option One - Take the product down market to sell more units. To achieve this, the price will be reduced by £10, the effect of the reduction in price will be partly offset by buying cheaper materials so the material cost per unit is reduced from £40 to £35 per unit. The Sales Director believes this will increase sales volumes by 20%.

 

Option Two - Maintain the value proposition but lease a new machine for £55,000 per annum. The new machine will reduce the labor cost per unit from £20 per unit to £16 per unit.

 

Note:  The company is bidding for a number of major contracts which have not been included in the budget. The accountant believes that if they are awarded these contracts they should sell 15,000 units in 2021.

 

With reference to the information above:

 

a)       Complete the table below

		Current Situation	Option 1	Option 2
Demand		10,000	12,000	10,000
Contribution per unit		£60
Total Contribution		£600,000
Fixed Costs		£620,000
Profit		(£20,000)
B-Even Point Units		10,333
B-Even Revenue		£1,240,000
Units to meet profit target of £25,000		10,750
Margin Of Safety (units)		-333
Margin Of Safety Ratio		-3%
C/S Ratio		50%
Breakeven Revenue (using C/S ratio)		£1,240,000