Next year's preliminary budget workings for Scrunchie, a breakfast cereal, the only product manufactured by H. F. Ltd, are shown below:

T he existing plant and equipment is considerably under-utilized and a proposal being considered is to extend sales to supermarkets, where the product would be sold under a different brand name. Estimated effects of this proposal are (i) Additional annual sales, to supermarkets 8,000 boxes @ £25 per box.
(ii) Cost of direct materials will be reduced as a result of a 5 per cent quantity discount on all purchases.
(iii) Extra supervisory and clerical staff will be required at a cost of £16,000 p.a.

(iv) Market research has indicated that sales to existing outlets will fall by approximately 10 per cent and there will be no change in selling price to these customers.
(v) Stocks and creditors will increase by £25,000 and £15,000, respectively, and the credit period extended to supermarkets will be double that given to existing customers.
Required:
Present data to assist in the evaluation of the proposal. Specifically you should

(a) Prepare a revised budgeted revenue account and statement of net assets employed incorporating the results of the proposal.

(b) Calculate the effect on profit of each of the changes resulting from the proposal and reconcile the total of these with the difference in budgeted profits.

(c) Advise management on the suitability of the proposal making any further calculations you consider necessary and adding any other comments or reservations you think relevant.

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H.F. Ltd Budgeted Revenue Account for the year ending 30 September 1984 Sales (20,000 boxes, containing standard packets) 600,000 Direct materials 240,000 Direct labour 102,000 Variable overhead 70,000 Fixed overhead 122,200 534,200 Profit 65,800 H.F. Ltd Budgeted Net Assets as at 30 September 1984 Fixed assets (net of depreciation) Working capital: Debtors Stocks Creditors Net assets employed 310,000 50,000 65,000 (25,000) 90,000 400,000