2

(a) A break-even chart is shown on page 224 for Windhurst Ltd.

You are required.

(i) to identify the components of the break-even chart labelled p, q, r, s, I, u, v, w, x and y.

(5 marks)

(ii) to suggest what events are represented at the values of x that are labelled m and non the chart ; (3 marks)

(iii) to assess the usefulness of break-even analysis lo senior management of a small company.

(7 marks)

(b) Hackett Ltd produces gudgeons and bludgeons. The company 's budget for t 98 t includes the following data :

The budget is designed to show a figure of profit or loss for each product, after apportioning joint fixed costs of £100000 in proportion to the number of units of each product sold.
For 1981 gudgeons are budgeted to show a profit of £14000 , and bludgeons a loss of £2000. The number of units of each product sold is expected to be equal.
You are required to write a report to the managing director of Hackett Ltd advising him on the basis of the information given whether to implement any of the following three proposals:
(i) to increase the price of bludgeons by 25%, in the expectation that the price elasticity of demand over this range of prices will be unity ; (4 marks)
(ii) to make changes to the production process that would reduce the joint fixed costs by 12~% and increase the variable costs of each product by 10%; (3 marks)
(iii) to introduce both of the above changes .

Transcribed Image Text:

Unit selling price () Contribution margin ratio (%) Gudgeons Bludgeons 10 5 40 60 60