SECTION A

QUESTION ONE

Euston plc is a medium sized manufacturing company that manufactures a power-bank which it sells to retailers for £30 per unit. As a management consultant, you have been hired to review the profitability of the firm. Because its main market is the UK, the company prepares its budget in pounds sterling. The costs for each power-bank are as follows:

The company’s total fixed costs for the year are estimated at £240,000. The company expects to make and sell 25,000 units of power-bank in the next year.

Required:

The managing director of the company has requested you to calculate the following information to present in the next board meeting.

a) What is the break-even both in number of units and in sales revenue (£)?

b) What is the margin of safety in number of power-banks and briefly explain what this figure means?

c) If the company wanted to earn a profit of £120,000 in a year, how many power-banks must be sold?

d) Refer to the original data. To improve the company’s profitability, one of managing directors at Euston plc has suggested to spend £90,000 on a number of newspaper advertising campaigns which is expected to increase demand sales by 40% in the next year. With supporting calculations, recommend whether the company should adopt this strategy.

e) The company has just been approached by a new customer from Italy who wants 7,000 of these power-banks at a reduced price of £23 per unit. Shipping and distribution costs of this order to Italy will require the company to incur additional fixed costs of £6000. With supporting calculations, recommend whether the company should accept this order.