Question 5

Assume that the income statement for Tolkien Transport last month is as follows:

Revenue (500 customers*2000)	1,000,000
Less variable expenses	410,000
Contribution Margin	590,000
Fixed Costs	530,000
Net Profit	60,000

Note: The revenue given is calculated by multiplying number of customers last month (500) by 2,000 the average price for transportation services

Required:

1. Calculate the break-even point in units and in pounds last month. (3 marks)

2. How many customers would Tolkien Transport need to generate a profit of 119,000? (3 marks)

3. Compute the company's margin of safety last month in both pound and percentage terms. (3 marks)

4. If revenue increases by 300,000 this month and there is no change in fixed costs, by how much would you expect profit to increase? (Do not prepare a profit and loss account; use the CM ratio to compute your answer.) (5 marks)

5. Refer to the original data. Tolkien Transports marketing team is convinced that a 15% reduction in the selling price would cause customer numbers this month to increase by 150 units. Calculate the impact on monthly profit. (7 marks)

6. Using the data from part (e), calculate the price elasticity of demand for its transportation service (based on a 15% reduction from the current selling price). (3 marks)

7. Calculate the profit-maximising mark-up on variable costs and use this to estimate the profit-maximising price for the transportation service. Based on this, what advice would you give Tolkien? (5 marks)

8. The absorption costing approach represents an alternative cost-plus pricing method. Explain how Tolkien would could this approach to determine the price of its transportation service, highlighting the advantages and disadvantages compared to the pricing method outlined in part (g). (6 marks)

(Total: 35 marks)