Boleyn Ltd was formed three years ago by a group of research scientists in London to market a new product that they had invented, which takes used rubber tyres and converts them into materials used with concrete in the manufacture of houses. This market has many competitors so Boleyn strives to provide materials of very high quality that sets them apart from their rivals. The technology involved in the manufacturing is both complex and expensive. Because of this, the company is faced with a high level of fixed costs. It was expected, when capital investment appraisals were done before purchasing the expensive machinery, that the sales volume would match the enhanced full production capacity of 80,000 units. This has not happened. This is of particular concern to Dr Xi, the company's chief executive. She recently arranged a meeting of all management staff to discuss company profitability. Dr Xi showed the managers how average unit cost fell as production volume increased and explained that this was due to the company's heavy fixed cost base. It is clear that as we produce closer to the plant's maximum capacity of 80,000 units, the average cost per unit falls. Producing and selling as close to that limit as possible must be good for company profitability The budgeted data she used for the forthcoming year is reproduced below. Production volume 50,000 80,000 70.000 80.000 Average cost per unit (E) 586 530 490 460 *Defined as the average cost per unit of fixed and variable costs combined. For the purposes of calculation, it can also be assumed that fixed costs will remain the same within the production range of 50,000 to 80.000 units and that the variable costs per unit will also remain the same. It can also be assumed that the units are sold as soon as they are produced Expected sales demand and production volume: 75,000 units. Selling price per unit = 580. There is no possibility of increasing capacity in the forseeable future You are a member of Boleyn Ltd's management accounting team and shortly after the meeting you are called to a meeting with Mohinder Amarnath, the company's sales director. He is interested in knowing how profitability changes with production. Mohinder Amarnath now tells you of a discussion he has recently had with Dr Xi, who had once more emphasised the need to produce as close as possible to the maximum capacity of 80,000 units Mohinder has the possibility of obtaining an order for an extra 5,000 units but, because the competition is strong, the selling price would only be 450. Dr Xi has suggested that this order should be rejected as it is below cost and so will reduce company profitability. However. De Xi is interested in another order from a new customer in Germany for 15,000 units. Boleyn Ltd. has decided to diversify the risk of selling exclusively to the current market and has decided to reduce the exposure to it by selling some of the units originally meant for the current market to the German market. She would be prepared on this occasion to sell the units on a cost basis for 450 each and fulfil the whole order as this is a new customer, and this would be the 1st sale out of the United Kingdom REQUIRED a) Calculate the fixed costs in total of the company and the budgeted profit for next year. (7 marks) b) Calculate the breakeven point in s and the margin of safety in %. (4 marks) c) Explain to Dr Xi why the average cost per unit of production is decreasing as production volume increases. (4 marks) d) Calculate the impact on profit from accepting (1) the order of 5,000 units suggested by Mohinder Amamath and (m the German order of 15,000 units. (7 marks) e) What other factors would you take into account when deciding whether to accept either of the orders? (18 marks) f) As an alternative to accepting the whole overseas order of 15.000 units, what is the maximum order size at the same selling price of 460 per unit that would give you the same impact on profit as the UK order of 5,000 units at a price of 450? (10 marks)
