Non-graphical CVP behaviour. Tweed Lid is a company engaged solely in the manufacture of jumpers, which are bought mainly for sporting activities. Present sales arc direct to retailers, but in recent years there has been a steady decline in output because of increased foreign competition. In the last trading year (2001) the accounting report indicated that the company produced the lowest profit for 10 years. The forecast for 2002 indicates that the present deterioration in profits is likely to continue. The company considers that a profit of £80 000 should be achieved to provide an adequate return on capital. The managing director has asked that a review be made of the present pricing and marketing policies. The marketing director has completed this review, and passes the proposals on to you for evaluation and recommendation, together with the profit and loss account for year ending 31 December 2001.

Tweed Ltd profit and toss account for year ending 31 December 2001

The information to be submitted to the managing director includes the following three proposals:

i To proceed on the basis of analyzes of market research studies which indicate that the demand for the jumpers is such that 10 per cent reduction in selling price would increase demand by 40 per cent.

---

ii To proceed with an enquiry that the markering director has had from a mail-order company about the possibility of purchasing 50 000 unitsannually if the selling price is right. The mail order company would transport the jumpers from Tweed Ltd to its own warehouse, and no sales commission would be paid on these sales by Tweed Ltd. However, if an acceptable price can be negotiated, Tweed Ltd would be expected to contribute £60 000 per annum towards the cost of producing the mail order catalogue. It would also be necessary for Tweed Ltd to provide special additional packaging at a cost of £0.50 per jumper. The marketing director considers that in 2002 the sales from existing business would remain unchanged at 100 000 units, based on a selling price of £10 if the mail order contract is undertaken.

---

iii To proceed on the basis of a view by the marketing director that a 10 per cent price reduction, together with a national advertising campaign costing £30 000 may increase sales to the maximum capacity of 160 000 jumpers.

Required:

a The calculation of break-even sales value based on the 2001 accounts.

---

b A financial evaluation of proposal (i) and a calculation of the number of units Tweed Ltd would require to sell at £9 each to earn the target profit of £80 000.

---

c A calculation of the minimum prices that would have to be quoted to the mail order company, first, to ensure that Tweed Ltd would, at least, break even on the mail order contract, secondly, to ensure that the same overall profit is earned as a proposal (i) and, thirdly, to ensure that the overall target profit is earned.

---

d A financial evaluation of proposal (iii).
 

Sales revenue (100 000 jumpons at 10) Factory cost of goods sold Direct materials Direct labour Variable factory overhoads Fixed factory overheads Administration overhead Selling and distribution overhead Sales commission (2% of sales) Delivery costs (variable per unit sold) Fixed costs Profit 100 000 350 000 60 000 220.000 20 000 50 000 (E) 730 000 140 000 1000 000 40.000 110.000 980.000 20.000