A young entrepreneur who has developed a new innovative product has been invited to pitch on the BBC TV programme 'Dragons Den'. The product is called 'Boot Magic' and is designed to clean football boots without the inside of the boot getting wet. He is also a keen footballer and had this idea whilst struggling to clean his own boots.
He has watched the programme on numerous occasions and has noticed the candidates often struggle when discussing the 'numbers' with the Dragons. He is therefore keen to be prepared and has asked you, his new accountant to assist with the important financial data, especially the breakeven point.
The product information is:
Potential Selling Price £25 Cost of material £10 Cost of labour to produce one unit £5 Variable overheads per unit £2
He is forecasting to produce and sell 3,000 units in the year.
He will also incur semi-variable costs relating to his power usage. The budget for the year ahead is as follows:
He has hired a small factory unit on a local industrial site for one year which will cost £12,000. He has also committed to an advertising campaign with a local company that will cost £6,000 for the year.
Required:
a) Calculate the breakeven point for the 'Boot Magic' for the year.
b) Calculate the margin of safety in both unit and percentage terms.
Following his 'Dragon Den' appearance one of the Dragons is keen to invest but has requested the following modifications for the product.
- Higher quality materials should be used which will increase the material price by 10%
- As a result, the labour required will increase by 5%
- Additional advertising of £2,000 per year
- Selling price to rise to £30
- Forecast sales will rise by 10%
Required:
c) Calculate the new break even point for the product.
d) Calculate the new margin of safety in both unit and percentage terms.
e) Identify two advantages and two disadvantages of breakeven analysis.