Philly Ltd manufactures a portable high-definition music player (The ZX99) with high specifications at a lower price than its rivals. The company has progressed from producing music players that mainly played mp3s, because of the advent of smartphones which have made budget mp3 players obsolete.

During 2018, the company operated at full capacity of 250,000 units, selling its music player for £120. A new Managing Director (Vicky Anderson) has recently joined the company and has asked you to advise on the company's selling price policy. The sales price of £120 was previously viewed as satisfactory because the resulting demand enabled full capacity operation.

You have been asked to investigate the effect on costs and profit of an increase in the selling price.

Appendix 1 shows costs and revenues of ZX99 last year (2018). The company is now planning for 2019

Further information relating to 2019 can be found in the accounts of meetings between Vicky Anderson and other senior members of staff (see Appendices 2-4)

The company will start 2019 with £800,000 as its bank balance. Tax of £800,000 is expected to paid in Quarter 3, with dividends of £1,000,000 in Quarter 2 and £500,000 in Quarter 4.

Requirements

(a)          Calculate the annual profit which is earned with the current selling price of £120 per unit for 2018 (using only the data from Appendix 1)

(b)          Assuming the same cost structure for 2019 (but subject to any possible amendments from the appendices), Prepare schedule to show the annual profit which would be earned with each of the three alternative selling prices referred to by the Sales Director. Based on the figures calculated, recommend the selling price that should be charged for the high definition music player, to maximize Philly Ltd.'s profit. Calculate the breakeven point (units) and the margin of safety (%s) at this profit maximizing level. (Ignore any potential bad debts and sales discounts, mentioned by the Sales Director, when calculating profit)

(c)          Are there any other non-financial factors to be considered when making the decision regarding the selling price.

(d)          Based on the profit-maximizing decision, prepare the production, material, labor and cash budgets (split into quarters) 

(e)          Reconcile the budgeted profit chosen in (b) with the actual results for 2019 by means of variance analysis 

(f)            Suggest possible reasons for the difference between actual and budgeted results making recommendations of possible action by Philly Ltd to help improve future performance. 

Appendix 1

The following data relates to costs and revenues of the ZX99 last year (2018)

£

Sales

120.00

Direct materials*

1 component pack @ £32.5

32.50

Direct labour

1.4 hours @ £14.6

20.44

Variable production overhead

1.4 hours @ £2.4

3.36

Sales commission

10% of sales price

12.00

Fixed production overheads

4,000,000

Fixed selling overheads

1,500,000

Fixed administrative overheads

1,000,000

All fixed overheads arise evenly throughout the year

*Each music player requires 1 set of components which are bought together from one supplier