ABC company that manufacture guitar called "greatest" guitar. You are now hired to review the company's profit.

The costs for each "greatest" guitar are as follows:

Direct materials

300

Direct labour cost (each guitar takes 5 hours)

150

Other variable manufacturing costs

70

Annual fixed costs

750,000

Demand for the "greatest" guitar is increasing and ABC company expects to produce and sell 3,000 units at a selling price of 800 next year.

However, under the pressure of competitors, ABC company have agreed to increase hourly wages to 34 to avoid losing skilled member. It is forecast that annual fixed costs will increase to 800,000. As a result, they increased the selling price by 6%, but this has reduced the sales forecast to 2,800 guitars. Other costs remain the same.

From the new information, the following are required:

1) The contribution per unit and the breakeven point in unit sales and revenue.

2) The new margin of safety in percentage and unit terms.

3) Explain how these changes to budget assumptions is likely to have on the risk of ABC company in making a loss. Also, recommend steps the company could take to reduce the risk of making a loss.