13.5 The summarized profit and loss account of Latchmere Ltd for 20X6 is as follows:

£ £

Sales (100,000 units @ £2 each) 200,000 Raw materials 50,000 Wages 100,000 Depreciation 10,000 160,000 Gross profit 40,000 General expenses 20,000 Net profit 20,000 The company’s plant has now reached its maximum level of production and the directors are considering proposals for expansion. Two plans have been suggested:

1 The purchase of additional plant of the same type and capacity as that in use at present, and which will operate at exactly the same raw materials and wages costs per unit as the existing plant, in the expectation of doubling the level of sales. It is thought that a market exists at the current selling price of £2 per unit. The plant will cost £100,000.

2 The purchase of additional plant, at a cost of £200,000, capable of manufacturing a similar product with the same raw material content as the current product, but for which the wages cost will be reduced to 15 per cent of the expected selling price of £2 per unit.

Under both plans, additional general expenses amounting to £5,000 will be incurred for any increase in turnover up to £100,000 (total sales £300,000) and a further £10,000 will be incurred for any increase in turnover above £100,000 and up to £200,000 (total sales £400,000). The cost of production and the selling price per unit of the first £200,000 of sales will be the same as for 20X6, and the profit on those sales will be unchanged.
For both plans, the life of the new plant will be ten years, at the end of which it will have a zero scrap value. The purchase will be financed by a fixed-term ten-year loan at 10 per cent per annum.

(a) Prepare a trading and profit and loss account of Latchmere Ltd for 20X7 assuming that plan 1 is implemented and that the expected sales increase of £200,000 is achieved.

(b) Calculate the minimum increase in sales needed under plan 2 to ensure that the net profit after charging interest is equal to the profit it is calculated will be produced under plan 1.

(c) Calculate the sales necessary in 20X7 under plan 2 that give the company as a whole the same net profit, after interest, as was earned in 20X6, that is, £20,000.