Learning outcome 3 – (25 marks)
Sams Ltd is specialized in producing and selling washing machines. In 2018, the manufacturing cost per unit included:
Direct material 125
Direct labor (20 minutes per unit) 45/hour
Variable manufacturing overhead 20
Variable selling expenses 15
Variable administrative expenses 10
Fixed costs for the year ended 31 December 2018 were:
Fixed manufacturing 1,100
Fixed selling and distribution 1,450
Fixed administrative 675
The company produced and sold 220,000 units at £225 per unit.
In 2019, management has decided to increase the selling price by 25% and to maintain the same contribution margin ratio as last year. This increase in price is to meet an increase of £1,450,000 in fixed costs in 2019. The company has produced and sold the same quantity in 2019 as last year.
(a) Calculate the break-even point and margin of safety in both units and
revenue for the two years, 2018 and 2019, and briefly comment upon
(b) Critically discuss key assumptions attached to the breakeven model,
within the light of the reality of today’s business environments.