Safegloves Ltd is a small-size UK disposable medical gloves manufacturer. They have enjoyed a relatively stable environment in previous years
Safegloves Ltd is a small-size UK disposable medical gloves manufacturer. They have enjoyed a relatively stable environment in previous years with expected profits almost matching the actual profits. Based on historical sales data other assumptions, they came up with the following figures for their expected activities in 2020...
Selling price for a pair of gloves - £3.00 Variable cost for a pair of gloves - £1.30 Fixed costs for the year - £100,000 Expected sales volume – 100,000 pairs
Further research has shown that there may be a disruption to their normal activities in 2020. Ten businesses entered into the glove manufacturing market in December 2019. Three staff members of Safegloves have informed the management that they have been offered a job at one of the new rival companies and would take the job if they are not offered a pay rise. There is also news that the rival firms will offer their gloves at much lower prices in 2020. Safegloves might be forced to lower the selling price of their gloves or risk a decline in sales demand if this information is true. Inflation might increase by 5% in the UK in 2020. This would mean an increase in fuel expenses and other costs. Safegloves are worried that a change in the selling price or costs might severely affect their expected profit.
They have heard of sensitivity analysis and have approached you as a management accounting consultant to carry out sensitivity analysis based on the above information.
a) Calculate the breakeven point in units and margin of safety in %. [2 marks]
b) Calculate the expected profit. [2 marks]
c) Assuming all assumptions made are worse by 25%, perform a sensitivity analysis based on the information above and advise the management of Safegloves Plc on which variables are most sensitive to the expected profit. [6 marks]
d) Briefly discuss other factors Safegloves might wish to consider in their profit forecasts. [3 marks] You are required to show all workings.
e) Assuming that Safegloves makes other types of products, critically discuss the appropriate control mechanism to use for the gloves centre and the management style that should be used to access the performance of the manager of the gloves centre. [12 marks]