Mike is the Managing Director of the Sporting Company, a small specialist manufacturer of fleece jackets. In recent years the business has suffered a decline in sales, and profits for the year ended 30 December 2015 were 15,200.

You are provided with the following information:

Sporting Company Limited

Trading Profit and Loss Account

Year ended 30 December 2015

Sales Revenue			200,000
Cost of Goods Sold
Direct materials	20,000
Direct labour	70,000
Variable overheads	10,000
Fixed production overhead	40,000
		140,000
Administration overhead		20,000
Selling and Distribution overheads
Sales commission	10,000
Delivery costs	10,000
Fixed costs	4,800
		24,800
			184,800
Profit			15,200

Sales for 2015 were 10,000 jackets at a selling price of 20 each. Sales commission is payable at 5% of sales, and delivery costs vary in accordance with the number of jackets sold. Direct materials and direct labour are variable costs. Mike is considering two proposals aimed at improving profitability as follows:

1. Reduce the selling price of jackets by 10% which Mike anticipates will lead to a 40% increase in demand

2. Enter into a contract with a mail order company to supply them with 2,500 jackets per year. The Sporting company would be required to contribute 6,000 per year towards the cost of producing a mail order catalogue, and additional packaging costs of 1 per jacket would be payable by the Sporting Company. The mail order company would transport all the jackets from the Sporting Company to its own warehouse, and no sales commission would be payable by the Sporting Company. Mike anticipates that the existing sales of 10,000 per year would be unaffected if the mail order jackets contract is undertaken.

Required:

1. Calculate break-even sales at the 2015 level of activity.

(2 marks)

2. Provide Mike with a financial evaluation of proposal (i).

(3 marks)

3. Advise Mike what the minimum selling price should be under proposal (ii) with the mail order company to ensure that the Sporting Company will break-even on the contract.

(5 marks)

d. Calculate the selling price required under proposal (ii) to make a profit of 10,000 per year from the mail order contract alone.

(2 marks)

e. Briefly advise Mike of the limitations of break-even analysis.

(3 marks)