Question 2

Night Garden Ltd has two divisions: Iggle and Piggle. Each division produced and sold 1 line of product only. The latest financial results of these divisions are presented below. In the current year Iggle and Piggle manufactured and sold 25,000 units and 20,000 units respectively.

	Iggle		Piggle
	()		()
Revenue	125,000		200,000
Less: variable costs	(25,000)		(80,000)
Contribution	100,000		120,000
Less: fixed costs	(50,000)		(90,000)
Operating profit	50,000		30,000

Required:

	Calculate the break-even point and margin of safety (as a percentage) of both businesses. Conclude on what the results of these calculations tell you about the performance of both businesses. (Max word-count: 100 for discussion part only)
	(9 Marks)
	Calculate the number of units the Piggle division would have to manufacture and sell to achieve a 60,000 profit. Clearly identify 3 (THREE) other considerations including the limitations of Cost-volume-profit (CVP) analysis, that the Piggle division would have to consider when planning to increase its volume? Discuss each identified consideration clearly linking with plan to increase volume. (Max word-count: 200 for discussion part only)
	(8 Marks)
	Calculate the operating gearing of both businesses. Illustrate the impact of operating gearing by showing what happens to the operating profit of both businesses when volume both INCREASES by 20% and DECREASES by 20%. What do these calculations tell you about the risk inherent in the cost structure of both Iggle and Piggle? (Max word-count: 150 for discussion part only)
	(8 Marks)
	Evaluate the following statement: In decision making, variable costs should always be considered as relevant costs. Candidates should state whether they agree/disagree with the statement, and elaborate their opinion. (Max word-count: 100)
	(5 Marks)
	(Total: 30 Marks)