Clothar

(a) Clothar pic manufactures one standard product and in common with other companies in the industry is suffering from the current depression in the market. Currently it is operating at a normal level of activity of 70%

which represents an output of 6,300 units but the sales director believes that a realistic forecast for the next budget period would be a level of activity of 50%.

You are required, from the data given in the current flexible budget above, to prepare a budget based on a level of activity of 50%, which should show clearly the contribution which could be expected .

(b) Discuss briefly three problems which may arise from such a change in level of activity

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Level of activity 60% 70% 80% Direct materials 37,800 44,100 50,400 Direct wages 16,200 18,900 21,600 Production overhead 37,600 41,200 44,800 Administration overhead 31,500 31,500 31,500 Selling and distribution overhead 42,300 44,100 45,900 Total cost 165,400 179,800 194,200 Profit is 20% of selling price.