Part 3

Simon has invented a new component for the wave turbine industry, and is considering starting to trade from and including 1 June 2022.

He has given you the following information.

Sales are forecast at 400 units per month.

Each unit will sell for 100 each.

Variable costs of manufacture are 60 each.

He has had the idea for the new component for several years, and in May 2022 he paid a firm of consultants 2,000 for a report on his new business.

He will resign from his existing job in order to run his business. He currently earns 34,000 per annum.

Fixed overheads of 2,000 per month are estimated, and include depreciation of 500 per month. Fixed overhead payments are payable in the month when they are incurred.

A sales person will be employed at a monthly salary of 1,500 plus a commission of 5 for every item sold. The sales persons salary and commission is not included in any of the above.

Required

a) Identify an example of i) a sunk cost, ii) an opportunity cost, and iii) a semi-variable cost in the above.

b) Calculate Simons i) break-even point ii) margin of safety (as a percentage) given anticipated annual sales of 4,800 units and c) his anticipated annual profit on sales of 4,800 units per annum.