The summary profit and loss statement for Mom Corp for the year ended 31 December

2012 is as follows:

Sales 320,000

Direct material cost 100,000

Direct labour cost 40,000

Production overheads

- Variable 20,000

- Fixed 15,000

Selling overheads

- Variable 16,000

- Fixed 30,000 221,000

Net Profit 99,000

During the year, Mom Corp has been operating at 80% capacity (40,000 units) for and sales of a single product. A forecast profit and loss statement is required for next year. The current figures will be used as the basis of the forecast, but the following changes should be implemented.

1. Selling prices will be reduced by 2%, but this will result in production/sales volume being increased to 100% capacity level.

2. Direct material prices will increase by 10%.

3. Direct labour rates will increase by 5% but this will result in a 10% saving through increased efficiency.

4. Variable production overhead per unit will increase by 3%.

5. Variable selling overhead will be incurred at the same percentage of sales revenue as in the current year.

6. Fixed production overhead will increase by 3,000.

7. Fixed selling overhead will increase by 5%.

Required:

A. Prepare a forecast profit and loss statement for the year. Your solution should show the contribution as well as net profit.

B. Calculate the contribution/sales ratio for the current year AND the forecast and comment on any change in the profitability of the company.