Intermediate: Separation of fixed and variable costs and construction of a break-even graph A building company constructs a standard unit which sells for £30000. The company’s costs can be readily identifiable between fixed and variable costs.

Budgeted data for the coming six months includes the following:

You are told that the fixed costs for the six months have been spread evenly over the period under review to arrive at the monthly profit projections.

Required:
(a)Prepare a graph for total sales, costs and output for the six months under review that shows:
(i) The break-even point in units and revenue.
(ii) Total fixed costs.
(iii) The variable cost line.
(iv) The margin of safety for the total budgeted sales.

(b) The company is worried about the low level of sales. The sales director says that if the selling price of the unit was reduced by £5000 the company would be able to sell 10% more units. All other costs would remain the same you are told.
Determine whether the company should reduce the selling price to attract new sales in order to maximize profit. Clearly show any workings. (5 marks)

(c) Evaluate whether the assumption that costs are readily identifiable as either fixed or vari¬ able throughout a range of production is realistic. Give examples of any alternative classification.LO1

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Sales (in units) Profit January 18 70 000 February 20 100 000 March 30 250000 April 22 130 000 May 24 160 000 June 16 40 000