| |
a) Budgeted profit presented in a marginal costing format
|
|
|
Company 1 |
Company 2 |
Company 3 |
|
|
|
€ |
|
€ |
|
€ |
|
|
Sales |
100000 |
|
100000 |
|
100000 |
|
|
Variable costs |
80000 |
|
60000 |
|
40000 |
|
|
Contribution |
20000 |
|
40000 |
|
60000 |
|
|
|
|
|
|
|
|
|
|
Fixed costs |
30000 |
|
50000 |
|
70000 |
|
|
Net
Profit |
-10000 |
|
-10000 |
|
-10000 |
b) The budgeted break-even point in both units and sales value
| |
|
Company 1 |
|
Company 2 |
|
Company 3 |
|
|
|
Fixed. costs |
30000 |
|
50000 |
|
70000 |
|
|
|
Contribution per unit |
1.00 |
|
2.00 |
|
3.00 |
|
|
|
|
|
|
|
|
|
|
|
|
Break-even units |
30,000 |
units |
25,000 |
units |
23,333 |
units |
|
|
|
|
|
|
|
|
|
|
|
Break-even revenue |
€150,000 |
|
€125,000 |
|
€116,665 |
|
c) The impact on profits of an increase of 10 per cent in sales volume
and price
|
|
|
Company 1 |
Company 2 |
|
Company 3 |
|
|
SP |
SV |
|
SP |
SV |
|
SP |
SV |
|
|
|
|
|
|
|
|
|
|
|
Sales |
110000 |
110000 |
|
110000 |
110000 |
|
110000 |
110000 |
|
Less Variable costs. |
80000 |
88000 |
|
60000 |
66000 |
|
40000 |
44000 |
|
Contribution |
30000 |
22000 |
|
50000 |
44000 |
|
70000 |
66000 |
|
|
|
|
|
|
|
|
|
|
|
Less Fixed costs |
30000 |
30000 |
|
50000 |
50000 |
|
70000 |
70000 |
|
Net
profit |
0 |
7500 |
|
0 |
-6000 |
|
0 |
4000 |
|
|
|
|
|
|
|
|
|
|
d)
The profit multipliers for sales volume and sales price variables
| |
Company 1 |
Company 2 |
Company 3 |
|
|
Sale volume |
Sales
price |
Sales
volume |
Sales
price |
Sale
volume |
Sales
price |
|
%
change profit
|
100% |
25% |
100% |
40% |
100% |
60% |
|
% change key variable |
10% |
10% |
10% |
10% |
10% |
10% |
|
Profit
multiplier |
10 |
2.5 |
10 |
4 |
10 |
6 |
e) Briefly comment on your answers to (d) in relation to the distribution
between each companies fixed and variable expenses
As can be
seen from the data company 1 has a low fixed operating costs structure
whereas company 3 has a high fixed cost operating structure. All three
company’s are equally sensitive to changes to sales price but one can
see that the company with the high fixed costs structure (company 3) has
the highest sensitivity rating for sales volume changes. One can also
see that the company with the lowest level of fixed costs has the lowest
sensitivity rating for sales volume fluctuations. These sensitivity ratings
increase for company 2 with its higher fixed costs. This makes sense as
a business with high fixed costs must generate a high sales volume to
cover these fixed costs and thus profit is more sensitive to changes in
these key variables.
| |
Comment on the fact that company 3 is most sensitive to changes
in sales volume |
|
|
Co
1 10% increase or decrease in sales results in profit increasing
or decreasing 25% |
|
|
Co
2 10% increase or decrease in sales results in profit increasing
or decreasing 37.5% |
|
|
Co
3 10% increase or decrease in sales results in profit increasing
or decreasing 50% |
|
|
Co
3 most sensitive due to different cost structure High fixed costs
relative to variable |
|
|
Costs explain |
|
|
|
|
|
|
|
|
Comment on the sales price PM and how as SP increases there are
no similar |
|
|
increases in fixed or variable costs |
|
|
|
|
|