# 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)  •  915 Views

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

Report this essay
Page 1 of 2

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

...

...