Edwards & Co Ltd manufactures teddy bears. The company’s bears are in demand all year round and in the next financial year the sales manager plans to sell 12,000 teddies. The management accountant collects cost information for 1 unit of production (1 teddy bear). Based on last year’s figures, each unit will sell for £10 and the variable costs will consist of direct materials, which will cost £1.00 per unit, and direct labour, which will cost £5.00 per unit. The fixed costs for the year are expected to be £32,000.

Required You have been asked to provide information that will help the managing director consider the effect on profitability of changes in the level of sales activity next year.

(a) Draw up a marginal cost statement that calculates the contribution per unit.

(b) Draw up a marginal cost statement on the basis that 12,000 units will be sold and calculate the net profit or loss.

(c) Briefly explain what is meant by the breakeven point.

(d) Using the contribution per unit you have calculated in (a), calculate the following, showing the formulae in words and your workings:

(i) The breakeven point in number of units.

(ii) The breakeven point in terms of total sales value.

(hi) The level of sales activity to reach a target profit of £20,000.

(iv) The margin of safety in units at the level of sales activity you have computed in (hi).