Profit, loss, breakeven volume calculations
Imagine you are the CEO of Fun & Games plc, a company engaged in the manufacture of children’s toys.
A report shown to you by the chief operational officer contains the data shown in Table 3.
Table 3 Cost data
| Data | £ |
| Sales price per unit | 32.00 |
| Variable costs per unit: | |
| Direct materials costs | 12.00 |
| Direct labour costs | 6.00 |
| Variable support costs | 2.00 |
| Fixed costs per month | 9,000 |
The company currently sells 3000 stuffed toys each month. The marketing director has always believed that “increasing the sales price per unit by 10% will simply cause a 10% drop in demand and so it’s not worth increasing prices”.
- a. Produce a statement showing the current monthly profit or loss.
(20 marks)
- b. What is the current breakeven volume?
(5 marks)
- c. Assuming that the marketing director assumptions on price and demand are correct produce a statement showing the profit or loss if the company were to increase its sales price per unit by 10% (and so loses 10% of volume of demand). Is the marketing director correct that it makes no difference?
(15 marks)
Show all workings.
Word limits have not been set as your answers are quantitative in nature, requiring calculations but very few words. In other words, be as brief as possible in your written answers to questions a, b, c.
