Blusky Ltd, is an electronics company based in Oxford which manufactures top of the range IT products including laptops and tablets. With more and more purchases being made on-line, the company has decided to manufacture a new tablet which is capable of scanning any item (the actual item or image of the product) and then automatically search the market on-line for the best price for that item.

The production cost of each tablet are made up of £314 of direct material and £29.50 of variable overheads. The total annual fixed costs that can be associated with the production of this new tablet are estimated at £261,600.

The value of investment associated with the production of the new tablets is £2,700,000. The directors only consider taking on new projects if they produce a minimum return on investment of 8.5%. The company expects to sell annually 9,500 of these tablets at a price of £399 each. The maximum production capacity for this new tablet is 11,500 units per year.

Required:

1. Calculate the company’s expected profit from these new tablets for the year and show whether this meets the minimum required return on investment.
2. Calculate the company’s break-even point in number of tablets and in sales value. Explain what break-even point indicates.
3. Calculate the margin of safety as a percentage of the expected level of sales, and briefly explain what this figure means
4. By calculating the impact on profit, show which of the following two strategies, (if any), that the company is currently considering should be adopted:
5. The sales director suggests decreasing the selling price by £15. This is expected to increase the quantity demanded by 26%.
6. The marketing director suggests by spending £36,000 on a series of a marketing campaign and increasing the warranty period from one year to two years to stimulate sales. This strategy will add on average £14 to the total production cost of each tablet and is expected to increase quantity demanded by 30%.
7. BH Ltd, a medium-sized retailer of computers, has proposed to buy 3,500 of these new tablets at a lower price than the current price of £399 to allow it to make a 6% gross profit on its sales.
8. Using supporting calculations, suggest whether this order should be accepted. What would be the total profit of Blusky Ltd for the year if this order is accepted?
9. At what price will the order by BH Ltd enable BluSky Ltd to increase its total profits for the year to achieve an overall return on investment (ROI) of 11%?

NOTE – [To answer part (e), you should assume that none of the two strategies in part (d) above has been adopted]

6. Explain the main assumptions and limitations of breakeven analysis.