Polemic Ltd manufacture and sell a single product. The following information is available for three financial years ending 30 September.

Additional information:
1 When the management of Polemic prepared its direct labour forecast unit cost for 2002 and 2003, direct wages were increased only by the forecast rate of inflation.
2 The trade union representatives of the production workers wished to press for a greater wage increase. They suggested that:
(i) Direct wages be increased at twice the rate of inflation. The effect of this would be to increase direct labour costs per unit as follows:

(ii) Unit selling prices be increased in order to cover the increased labour costs.
3 It is to be assumed that all expense and revenue relationships will be unchanged except where indicated.

Required:

(a) A schedule for 2001, 2002 and 2003 for Polemic Ltd showing:
(i) the breakeven points;
(ii) the net profit for each year.
Base your calculations on the original labour costs.

(b) A graph showing a breakeven point for 2002.

(c) Advise Polemic Ltd’s management as to their response to the trade union’s claim for higher wages. Include relevant financial analysis.

(d) Explain the limitation of breakeven analysis.

Transcribed Image Text:

Price per unit Unit volume 000s Sales Actual 2001 Forecast 2002 Forecast 2003 130 129 128.5 525 50 52 53 Costs per unit Actual Forecast Produced 2001 2002 2003 Direct materials 50 55 55 Direct labour 30 31.5 33 Variable production overhead 10 11 12 Direct expenses 5 5 6 Variable sales overhead 15 16 16 Other costs for the year 000 000 000 Fixed production overhead 50 55 55 Other fixed overhead 200 220 220