The Widget Company Makes and Sells to Products, the Alpha and Beta. Below Is the Budgeted Profit Statement
Essay by Chenjie Zhu • February 10, 2016 • Business Plan • 260 Words (2 Pages) • 1,052 Views
Essay Preview: The Widget Company Makes and Sells to Products, the Alpha and Beta. Below Is the Budgeted Profit Statement
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
- Recalculate the profit, assuming the investment in machinery goes ahead.
- Calculate the margin of safety (%) before and after the investment in machinery
- 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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