ProtectMe 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 fora 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 ProtectMe 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. ProtectMe 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. ProctectMe 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 %.
ProtectMe 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 fora 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 ProtectMe 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. ProtectMe 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. ProctectMe 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 %.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Concept explainers
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Question
Transcribed Image Text:ProtectMe 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 ProtectMe 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. ProtectMe 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.
ProctectMe 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 %.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education