Question - Answer the following questions:
1. The launch of a new product is under consideration. Its unit variable costs will be £30 and it is estimated that incremental fixed costs of £250,000 will be incurred if production is commenced. Forecast sales are 50,000 units. At what level of price for the new product will the organisation break even? If the actual planned selling price is £48 per unit, what will be the organisation's margin of safety?
2. The following information is about two organisations, A and B.
|
Organisation A
|
Organisation B
|
|
£
|
£
|
|
Fixed costs
|
60,000
|
12,000
|
|
Variable costs per unit
|
0.20
|
0.50
|
|
Unit selling price
|
0.60
|
0.60
|
|
Expected sales levels (units)
|
160,000
|
160,000
|
- Which firm has higher operating gearing?
- What is the expected net income of both firms?
- What would expected net income be for both firms if sales were a) 140,000 units and b) 180,000 units?
- Which firm is facing more risk in terms of its current sales predictions?
Be sure to demonstrate your numerical workings.