Momentoplates is a family business which has traded in souvenir plates for many years, buying blank plates from a local supplier and decorating them by hand. The decorated plates are sold to fancy goods retailers across the UK for £30 each. Marginal cost per unit is £16 and fixed costs per annum are £319,900. An average of 30,000 plates are sold every year. The crafts people who decorate the plates work for the business on a part-time basis and most of them are now moving towards retirement. The sales director has suggested that equipment could be leased which would allow plates to be decorated with good quality transfers through an automated process. Blank plates of a different specification and at a higher unit cost would need to be sourced from overseas. The combined effect of this and the reduction in direct labour cost per unit would halve each unit’s total marginal cost. The cost of leasing the equipment would be £49,850 per annum and additional salaried staff at a total annual cost of £150,000 would need to be appointed. The selling price would be reduced to £25.50, with the hope that volume would remain unchanged. Initial assessment of this plan yielded disappointing results. The sales director has calculated that if the new proposal were implemented, then the existing (historic) profit level could only be maintained if steps were taken to increase sales volume to 37,000 units per annum. She believes that this increase in demand could be achieved through additional annual expenditure on marketing. Required: Compute the profits, break-even points and margins of safety under the existing (historic) arrangements and under the new proposal, assuming no change in demand and no additional marketing expenditure. Calculate the maximum additional amount that could be spent per year on marketing in order to ensure that under the new arrangements and at a sales volume of 37,000 units, the profit would be maintained at its existing (historic) level. Evaluate the proposal - with and without additional marketing expenditure - and discuss any wider issues which should be considered. Marginal costing is usually deployed when decisions about volume are being made. Discuss the situations when businesses need instead to work with a full unit cost and explore too the problems associated with deriving full unit costs.

Momentoplates is a family business which has traded in souvenir plates for many years, buying blank plates from a local supplier and decorating them by hand. The decorated plates are sold to fancy goods retailers across the UK for £30 each. Marginal cost per unit is £16 and fixed costs per annum are £319,900. An average of 30,000 plates are sold every year. The crafts people who decorate the plates work for the business on a part-time basis and most of them are now moving towards retirement. The sales director has suggested that equipment could be leased which would allow plates to be decorated with good quality transfers through an automated process. Blank plates of a different specification and at a higher unit cost would need to be sourced from overseas. The combined effect of this and the reduction in direct labour cost per unit would halve each unit’s total marginal cost. The cost of leasing the equipment would be £49,850 per annum and additional salaried staff at a total annual cost of £150,000 would need to be appointed. The selling price would be reduced to £25.50, with the hope that volume would remain unchanged. Initial assessment of this plan yielded disappointing results. The sales director has calculated that if the new proposal were implemented, then the existing (historic) profit level could only be maintained if steps were taken to increase sales volume to 37,000 units per annum. She believes that this increase in demand could be achieved through additional annual expenditure on marketing. Required: Compute the profits, break-even points and margins of safety under the existing (historic) arrangements and under the new proposal, assuming no change in demand and no additional marketing expenditure. Calculate the maximum additional amount that could be spent per year on marketing in order to ensure that under the new arrangements and at a sales volume of 37,000 units, the profit would be maintained at its existing (historic) level. Evaluate the proposal - with and without additional marketing expenditure - and discuss any wider issues which should be considered. Marginal costing is usually deployed when decisions about volume are being made. Discuss the situations when businesses need instead to work with a full unit cost and explore too the problems associated with deriving full unit costs.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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The crafts people who decorate the plates work for the business on a part-time basis and most of them are now moving towards retirement. The sales director has suggested that equipment could be leased which would allow plates to be decorated with good quality transfers through an automated process. Blank plates of a different specification and at a higher unit cost would need to be sourced from overseas. The combined effect of this and the reduction in direct labour cost per unit would halve each unit’s total marginal cost. The cost of leasing the equipment would be £49,850 per annum and additional salaried staff at a total annual cost of £150,000 would need to be appointed. The selling price would be reduced to £25.50, with the hope that volume would remain unchanged.

Initial assessment of this plan yielded disappointing results. The sales director has calculated that if the new proposal were implemented, then the existing (historic) profit level could only be maintained if steps were taken to increase sales volume to 37,000 units per annum. She believes that this increase in demand could be achieved through additional annual expenditure on marketing.

Required:

Compute the profits, break-even points and margins of safety under the existing (historic) arrangements and under the new proposal, assuming no change in demand and no additional marketing expenditure.

Calculate the maximum additional amount that could be spent per year on marketing in order to ensure that under the new arrangements and at a sales volume of 37,000 units, the profit would be maintained at its existing (historic) level.

Evaluate the proposal - with and without additional marketing expenditure - and discuss any wider issues which should be considered.

Marginal costing is usually deployed when decisions about volume are being made. Discuss the situations when businesses need instead to work with a full unit cost and explore too the problems associated with deriving full unit costs.

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