13.3 During 20X4 Feather Ltd, which has a maximum possible output of 100,000 units, sold 60,000 units of a product and made a net profit of £20,000. The contribution per unit was £2, and the selling price was £5 per unit.

A competitor entered the market in November 20X4, and is selling a very similar product to Feather’s at £4.60 per unit. The management of Feather decides that it must introduce automation to meet this challenge and decides upon the following plan for 20X5:

(a) Reduce the selling price per unit to £4.50. This should increase sales to 90,000.

(b) Introduce new machinery with the result that annual fixed costs increase by £80,000.

(c) The new machinery will decrease variable costs by £1 per unit.

(a) Prepare the summary profit and loss account for 20X4, showing sales, variable costs, fixed costs and profit.

(b) Calculate the break-even level of sales for 20X4 in terms of units and £s.

(c) Prepare the forecast profit and loss account for 20X5, showing sales, variable costs, fixed costs and profit.

(d) Calculate the break-even level of sales for 20X5 in terms of both units and £s.