Talbot plc manufactures car alarms, and its trading results for the year ended 31 October 2014 are as follows:

£000 £000 Revenue (800,000 alarms) 7,200 Costs:

Materials: direct, variable 1,600 Labour: direct, variable 960 Labour: indirect, fixed 280 Other production overheads: variable 400 Other production overheads: fixed 640 Selling overheads: variable 480 336 ACCOUNT ING AND FINANC E FOR BUSINESS

£000 £000 Selling overheads: fixed 360 Distribution overheads: variable 280 Distribution overheads: fixed 120 Administration overheads: fixed 600

(5,720)

Operating profit for the year 1,480 Talbot Ltd is planning next year’s activity and its forecasts for the year ended 31 October 2015 are as follows:

1 A reduction in selling price per car alarm to £8 per alarm is expected to increase sales volume by 50%.

2 Materials costs per unit will remain unchanged, but 5% quantity discount will be obtained.

3 Hourly direct wage rates will increase by 10%, but labour efficiency will be unchanged.

4 Variable selling overheads will increase in total in line with the increase in sales revenue.

5 Variable production and distribution overheads will increase in line with the 50%

increase in sales volume.

6 All fixed costs will increase by 25%.

(a) Prepare a budgeted profit statement for the year to 31 October 2015 showing total sales and marginal costs for the year and also contribution and net profit per unit.

(b) Calculate the break-even point for the two years and explain why the break-even point has changed. Comment on the margin of safety in both years.

(c) Calculate the sales volume required (using the new selling price) to achieve the same profit in 2015 as in 2014.

(d) A director comments that: ‘With these figures, all we have to do to work out our budgeted profit is to multiply the net profit per unit by the units we want to sell.’ Why is this statement incorrect?