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The Widget Company Makes and Sells to Products, the Alpha and Beta. Below Is the Budgeted Profit Statement

Essay by   •  February 10, 2016  •  Business Plan  •  260 Words (2 Pages)  •  1,153 Views

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The Widget Company makes and sells to products, the Alpha and Beta. Below is the budgeted profit statement.

Alpha

Beta

Total

units

40,000

50,000

90,000

£

£

£

Sales

1,000,000

2,000,000

3,000,000

Materials

(600,000)

(1,000,000)

(1,600,000)

Labour

(240,000)

(450,000)

(690,000)

Contribution

160,000

550,000

710,000

Fixed overheads

(320,000)

Profit

390,000

The company is considering investing in some new machinery. It is expected to decrease unit material costs by £3 on the Alpha and £2 on the Beta. Labour costs are expected to decrease by £3 on the Alpha and £4 on the Beta. The machinery will cost £530,000.

Requirements

  1. Recalculate the profit, assuming the investment in machinery goes ahead.

  1. Calculate the margin of safety (%) before and after the investment in machinery

  1. Comment on whether you think the business should go ahead with the investment, mentioning any other factors to consider

Solution

Before

Unit Level

Alpha

Beta

Total

Alpha

Beta

units

40,000

50,000

90,000

£

£

£

£

£

Sales

1,000,000

2,000,000

3,000,000

25

40

Materials

(600,000)

(1,000,000)

(1,600,000)

(15)

(20)

Labour

(240,000)

(450,000)

(690,000)

(6)

(9)

Contribution

160,000

550,000

710,000

4

11

Fixed overheads

(320,000)

Profit

390,000

Average CM = (Q_A/total Q)*CM_A+(Q_B/total Q)*CM_B= (40/90)*4+(50/90)*11 =

7.8889

Average Price = (Q_A/total Q)*P_A+(Q_B/total Q)*P_B = (40/90)*25+(50/90)*40 =

33.3333£

Breakeven in units = Total Fixed Cost / Average CM = 320,000/7.8889=

40563

Breakeven in £ = Breakeven in units * Average Price = 40,563*33.333 =

1,352,113£

Margin of Safety = (Sales - BE in £)/Sales = (3,000,000-1,352,113)/3,000,000 =

55%

After

Unit Level

Alpha

Beta

Total

Alpha

Beta

units

40,000

50,000

90,000

£

£

£

£

£

Sales

1,000,000

2,000,000

3,000,000

25

40

Materials

(480,000)

(900,000)

(1,380,000)

(12)

(18)

Labour

(120,000)

(250,000)

(370,000)

(3)

(5)

Contribution

400,000

850,000

1,250,000

10

17

Old fixed overheads

(320,000)

Machinery

(530,000)

400,000

Average CM= (Q_A/total Q)*CM_A+(Q_B/total Q)*CM_B= (40/90)*10+(50/90)*17=

13.8889

Average Price = (Q_A/total Q)*P_A+(Q_B/total Q)*P_B = (40/90)*25+(50/90)*40 =

33.3333£

Breakeven in units = Total Fixed Cost/Average CM =(320,000+530,000)/13.8889=

           61,200

Breakeven in £ = Breakeven in units * Average Price = 61,200*33.333 =

 

      2,040,000 £

Margin of Safety = (Sales - BE in £)/Sales = (3,000,000-2,040,000)/3,000,000 =

32%

Although profit has increased, the venture is a little riskier. Attitude to risk will play a part in the final decision to invest in machinery

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