In 2019, Farnham Ltd produced and sold 200,000 units of a product called the "Frensham".
Below is the income statement for the production of the "Frensham" for 2019.
£
Sales revenue
3,800,000
Manufacturing costs:
Direct materials
550,000
Direct labour
1,900,000
Variable overheads
160,000
Fixed overheads
65,000
Total manufacturing costs
2,675,000
Administration costs
750,000
Selling & distribution costs:
Commission (5% of sales revenue) 190,000
Fixed selling overhead
170,000
Total selling & distribution costs
360,000
Profit
15,000
Required:
(Give your answ
rs to two decimal places)
(i) Calculate the Break-even point in units using the 2019 data.
(ii) Management believe that by introducing a higher quality material which
will cost 35p per unit extra and by paying for an advertising campaign
costing £120,000, they will be able to increase sales volume by 25%.
Calculate the profit on the new enhanced product.
(iii) A wholesaler agrees to take all 250,000 units of the new enhanced
product. To do so would reduce Administration fixed overheads by
£250,000, there would be no sales commission to pay and new selling
and distribution fixed overheads would be halved. However, the
wholesaler wants special packaging which would cost £2 per unit of
product. Calculate the lowest selling price the company could accept from
the wholesaler and still retain the same profit as in part (ii).