Question 1

Wheelcom Limited has been trading successfully for many years. It manufactures a part for vehicles and sells a single product. They are an established company based in a remote part of East Anglia and have a small number of loyal customers. They work hard to provide a good product and maintain excellent relationships with their customer base whose directors are well known to the company.

The companys financial accountant is due to retire in the next year and you have just started working for them as a business consultant. They provide you with the accounting information from the previous 6 years and ask you to compute some management accounting figures and give some advice about the future direction of the company.

The selling price of their product is 18 and has remained unchanged for the previous 6 years. The following information relates to its production and cost data for the previous 6 years.

Costs include variable, fixed or semi variable (You can assume that there is no change to the companys stock levels.)

Unit Total

Year Volume Costs

1 300,000 4,000,000

2 150,000 2,700,000

3 420,000 6,600,000

4 280,000 3,800,000

5 230,000 3,200,000

6. 120,000 2,100,000

Required:

1. Based on the above cost and volume data, use the High-Low method to identify variable cost per unit and annual fixed costs for the company.

[5 marks]

2. On the basis of your answers in part (a) above, calculate the breakeven point of the company in both units and sales revenue.

[5 marks]

3. The company expects to manufacture and sell 150,000 units this year. Calculate the margin of safety in percentage terms. Explain what this means for the company.

[5 marks]

4. Since the pandemic, the company have seen the cost of direct materials and labour rise and they are contemplating increasing the selling price. Explain how this is likely to affect your calculations above. Clearly stating whether this change will be likely to improve the company results or not.

[10 marks]

Total: 25 marks