The most recent statement of profit or loss for Whitney Company appears below. All variable expenses in the company vary in terms of unit sold, except for sales commissions, which are based on revenue. Variable manufacturing overhead is 30 pence per unit. There were no beginning or ending inventories. Whitney Company's plant has a capacity of 75,000 units per year.

The company has been operating at a loss for several years. Management is studying several possible courses of action to determine what should be done to make next year profitable.

Required

1. Redo Whitney Company's statement of profit or loss in the contribution format. Show both a Total column and a Per Unit column on your statement. Leave enough space to the right of your numbers to enter the solution to both parts of Question 2 below.
2. The managing director is considering two proposals prepared by members of his staff:
(a) For next year, the operating manager would like to reduce the unit selling price by 20%. She is certain that this would fill the plant to capacity.
(b) For next year, the sales manager would like to increase the unit selling price by 20%, increase the sales commission to 9% of revenue and increase advertising by ￡100,000. Based on marketing studies, he is confident this would increase unit sales by one-third.
Prepare two contribution statements of profit or loss, one showing what profits would be under the operating manager's proposal and one showing what profits would be under the sales manager's proposal. On each statement, include both Total and Per Unit columns (do not show per unit data for the fixed costs).
3. Refer to the original data. The managing director believes it would be a mistake to change the unit selling price. Instead, he wants to use less costly materials in manufacturing units of product, thereby reducing unit costs by 70 pence. How many units would have to be sold next year to earn a target profit of ￡30,200?
4. Refer to the original data. Whitney Company's board of directors believes that the company's problem lies in inadequate promotion. By how much can advertising be increased and still allow the company to earn a target return of 4.5% on sales of 60,000 units?

5 Refer to the original data. The company has been approached by an overseas distributor who wants
to purchase 9,500 units on a special price basis. There would be no sales commission on these units.
However, shipping costs would be increased by 50% and variable administrative costs would be reduced
by 25%. In addition, a £5,700 special insurance fee would have to be paid by Whitney Company to protect
the goods in transit. What unit price would have to be quoted on the 9,500 units by Whitney Company
to allow the company to earn a profit of £14,250 on total operations? Regular business would not be
disturbed by this special order.

Transcribed Image Text:

Revenue (45,000 units at £10) Less cost of goods sold: Direct materials Direct labour Manufacturing overhead Gross margin Less operating expenses: Selling expenses: Variable: Sales commissions Shipping Fixed (advertising, salaries) Administrative: Variable (billing and other) Fixed (salaries and other) Loss Whitney Company Statement of profit or loss for the year ended 31 December £27,000 5,400 £90,000 78,300 98,500 32,400 120,000 1,800 48,000 £450,000 266,800 183,200 202,200 £(19,000)