Question 2 (Total 50 marks)

King Ltd are planning to sell small soft toys to UK supermarkets. It has been decided that the selling price per unit in 2022 will be 5% less than last year's to help increase the number of units sold. Sales will be made using sales staff who are rewarded on a fixed salary plus commission basis. Last year's total sales revenue was 375,000 when 25,000 units were sold.

The managing director Collis King spoke to the chief accountant Val Myers, who established that the purchase price of each item is expected to be 10.50, while sales commission is set to be 40p per item. Other costs, which are independent of activity levels, are expected to be 35,460 for salaries (including to sales staff), 15,400 for rent and 17,190 for other costs. It is expected that 32,000 units will be sold in the coming year.

Consideration is being given to adjusting the rates of commission payable and to the possibility of abolishing commission and increasing basic salaries.

REQUIRED:

On the assumption that all expense and revenue relationships would remain unchanged except where specified, answer each of the following questions independently:

a) Calculate the expected profit for 2022 and also the breakeven point (all in s)(10 marks)

b) If commission was discontinued and salaries increased by a total of 15,250 per year

I) what would be the break even point in sales value (s)?

II) how many units would need to be sold to achieve a target net profit of 40,000 for the year?(10 marks)

c) What level of sales (units) would give the same profit under the old and new schemes?(10 marks)

d) State reasons for and reasons against the company adopting the plan in (b) rather than the original salary plus commission plan. Are there any other points to consider in addition to calculations made above? What do you think are the limitations of cost volume profit analysis?(20 marks)