Casius plc makes an item that sells for £15 per unit. The materials used cost the company

£5.00 per unit and the labour time allowed for each unit made is 30 minutes. The standard labour rate is £6 per hour, and the variable manufacturing overhead has been estimated at

£2.00 for each direct labour hour. The fixed manufacturing overhead amounts to £225,000.

Last year the company was able to produce and sell 60,000 units of this product but required only 20 minutes to make each unit. Otherwise, all other standards proved accurate.

The managing director of the company believes that if production can be carried on at the same degree of efficiency for the coming year, the price can be reduced to £12.50 per unit. This price reduction is expected to result in only a modest increase in sales volume to 63,000 units per year. It is not expected that profits will be increased greatly in the coming year, but in the longer term, the MD hopes to attract enough sales volume to enable her to expand the company and earn better profits in later years.

Required

(a) What effect does the increase in labour efficiency have on profits when comparison is made with the standard?

(b) Calculate the net profit for the coming year based on the above information and the managing director’s price reduction.