Intermediate: Decision-making and non-graphical CVP analysis You have been approached by a fnend who is seeking your advice as to whether he should give up his job as an engineer, with a current salary of £1400 per month, and go into business on his own, assembling and selling a component which he has invented.

He can obtain the parts required from various manufacturers.

It is very difficult to forecast the sales potential of the component, but after some research your friend has estimated that sales could be as follows:

(i) Between 600 and 900 units per month if the selling price is

£25 per unit.

(ii) Between 900 and 1,250 units per month if the selling price is

£22 unit.

The cost of the parts required would be £14 per completed component. However, if more than 1 000 units can be sold each month, a discount of 5% would be received from parts' suppliers on all purchases.

Assembly costs would be £6000 per month for assembly of up to 750 components. Beyond this level of activity, costs would increase to £7000 per month.

Your friend has already spent £3000 on development. which he would write off over the first five years of the venture on a straight·

line basis.

Required:

(a) Calculate for each of the possible sales levels whether your friend could expect to benefit by going into business on his own. (10 marks)

(b) Calculate the break-even point of the venture for each of the selling prices. (8 marks)

(c) Advise your friend as to the viability of the venture.