Question 6.1 Gardening Ltd manufactures garden ornaments which they supply to garden centres. Their results for the past 12 months have been as follows:

£’000 £’000 Sales (1 00 000 units) 5000 Direct materials 1000 Direct labour 1300 Variable production overheads 750 Variable selling and distribution overheads 450 Fixed production overheads 700 Fixed selling and distribution overheads 200 4400 Net profit 600 126 Managing Finance – A Socially Responsible Approach Required:

(1) Calculate the contribution per unit and break even level of production.

(2) The company is considering the purchase of new manufacturing equipment which will have the following effect:

fixed production costs will increase by £200 000 per annum;

direct labour costs will reduce by £3 per unit;

variable production overheads will decrease by 50p per unit.

(a) If the price is maintained what effect will this have on profit?

(b) If it is desired that profits should remain at the present level what price will need to be set for the product if sales volume is unaffected?

(3) If advertising expenditure were to be increased by £250 000, it is believed that the price could be increased by 6 per cent without affecting sales volume.

What effect would this have on the profits of Gardening Ltd?

(4) If the current price is increased by 10 per cent it is believed that sales volume would reduce by 5 per cent. What effect would this have on net profit?