The Widget Company Makes and Sells to Products, the Alpha and Beta. Below Is the Budgeted Profit Statement
Essay by Chenjie Zhu • February 10, 2016 • Business Plan • 260 Words (2 Pages) • 1,196 Views
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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
- Recalculate the profit, assuming the investment in machinery goes ahead.
- Calculate the margin of safety (%) before and after the investment in machinery
- 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 | |||||||
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