Tweed Ltd is a company engaged solely in the manufacture of jumpers, which are bought mainly for sporting activities.

Present sales are direct to retailers, but in recent years there has been a steady decline in output because of increased foreign competition. In the last trading year the accounting report indicated that the company produced the lowest profit for 10 years. The forecast for next year indicates that the present deterioration in profits is likely to continue.
The company considers that a profit of £80,000 should be achieved to provide an adequate return on capital. The managing director has asked that a review be made of the present pricing and marketing policies. The marketing director has completed this review, and passes the proposals on to you for evaluation and recommendation, together with the profit and loss account for the last trading year.
Tweed Ltd profit and loss account for last trading year:

The information to be submitted to the managing director includes the following three proposals:
(i) To proceed on the basis of analyses of market research studies that indicate that the demand for the jumpers is such that a 10 per cent reduction in selling price would increase demand by 40 per cent.
(ii) To proceed with an enquiry that the marketing director has had from a mail order company about the possibility of purchasing 50,000 units annually if the selling price is right. The mail order company would transport the jumpers from Tweed Ltd to its own warehouse, and no sales commission would be paid on these sales by Tweed Ltd. However, if an acceptable price can be negotiated, Tweed Ltd would be expected to contribute £60,000 per annum towards the cost of producing the mail order catalogue. It would also be necessary for Tweed Ltd to provide special additional packaging at a cost of £0.50 per jumper. The marketing director considers that in the next year sales from existing business would remain unchanged at 100,000 units, based on a selling price of £10 if the mail order contract is undertaken.
(iii) To proceed on the basis of a view held by the marketing director that a 10 per cent price reduction, together with a national advertising campaign costing £30,000, may increase sales to the maximum capacity of 160,000 jumpers.

Required:

(a) The calculation of break-even sales value based on the accounts for the last trading year.

(b) A financial evaluation of proposal (i) and a calculation of the number of units Tweed Ltd would require to sell at £9 each to earn the target profit of £80,000.

(c) A calculation of the minimum prices that would have to be quoted to the mail order company, first, to ensure that Tweed Ltd would at least break even on the mail order contract, secondly, to ensure that the same overall profit is earned as proposal (i) and, thirdly, to ensure that the overall target profit is earned.

(d) A financial evaluation of proposal (iii).

Transcribed Image Text:

Sales revenue (100,000 jumpers at 10) () () () 1,000,000 Factory cost of goods sold: Direct materials 100,000 Direct labour 350,000 Variable factory overheads 60,000 Fixed factory overheads Administration overhead Selling and distribution overhead Sales commission 220,000 730,000 140,000 (2% of sales) 20,000 Delivery costs (variable per unit sold) 50,000 Fixed costs 40,000 110,000 980,000 Profit 20,000