Question $11$

Clyde Ltd manufactures wheelbarrows. The projected statement of profit or loss

based on the current plan for the coming year is shown below:

Direct materials, direct wages and power and light are all variable costs. All other

costs are fixed costs.

The managers of Clyde Ltd want to maximise their profits for the coming year, but do

not wish to take unnecessary risks.

$($QUESTION CONTINUES ON NEXT PAGE$)$

Required:

$($a$)$ Calculate the following for the coming year based on the

current plan

i$.$ the breakeven point $($in units$)$

ii$.$ the margin of safety $($in units$)$

$($b$)$ Clyde is considering the following mutually exclusive options,

as alternatives to the current plan shown above:

Option A: Reduce the salaries of salespeople by a total of

$61,800$ per year, and instead pay a commission of $4\mathrm{.}40$ for

each unit sold. It is thought that this could increase sales $($in

units$)$ by $15\%.$

Option B: Increase sales $($in units$)$ by an estimated $10\%$ by

advertising in cinemas at an additional fixed cost of $100,800$

per year.

For each of Option A and Option B$,$ calculate:

i$.$ the planned sales $($in units$)$

ii$.$ the breakeven point $($in units$)$

iii. the margin of safety $($in units$)$

iv$.$ the profit $($in $)$

$($c$)$ Present your results in a table comparing the current plan with

Option A and Option B$.$ Referring to your table and the

information given in the question, make a recommendation to

the managers of Clyde Ltd$.$ Should management adopt the

current plan, or Option A or Option B$?$

Explain your reasoning.

$($d$)$ When managers are making decisions, they are required to

pay attention only to relevant costs. How should a manager

decide if a cost is relevant or not? Refer to the case of Clyde

Ltd$,$ where possible, to support your argument.