Budgeted PL account of Lochiel Manufacturing is given below at 100% operating capacity:

Sales (9,000 units @ $33)	$ 297,000
Less: Direct material	$ 54,000
Direct Labour (@ 6 per hour)	$ 72,000
Production overheads	$ 60,000
Gross Profit	$111,000
Less: Administration and selling costs	$63,000
Net Profit	$48,000

Capital employed of the company is $240,000. Fixed overheads included in production overheads are to be absorbed on the basis of labour hours at a rate of $3.50 per hour. Administration, selling and distribution costs include fixed cost component as under:

Administration $25,000 (80% fixed) Selling $18,000 (50% fixed) Distribution $20,000 (35% fixed)

MD is not happy with the current scenario which gives just 20 % ROCE. He needs it to be improved. So the following 2 proposals have been made:

a) Increase selling price to $35 per unit. Demand will fall by 10%. The capacity released would be used to produce another product with contribution of $1,000.

b) Major component which was manufactured internally now will be purchased JIT which gives 2 benefits to the company. Reduce average stock held by $30,000 and associated store costs by $6,000 p.a. (These were classified as fixed production overheads). Released productive capacity will help in increasing the production level by 10 %. However material purchases will also increase by $1.50 per unit.

Required:

a) Calculate break even point in units

b) Calculate Margin of safety at budgeted output level.

c) Compare the two proposals with original budget and comment (hint: use break even point and net income)