## Description

1. Solved: The launch of a new product is under consideration. Its unit variable costs will be £30 and it is estimated that incremental fixed costs of £250,000 will be incurred if production is commenced. Forecast sales are 50,000 units. At what level of price for the new product will the organisation break even? If the actual planned selling price is £48 per unit, what will be the organisation’s margin of safety? 2. The following information is about two organisations, A and B. Organisation A Organisation B £ £ Fixed costs 60,000 12,000 Variable costs per unit 0.20 0.50 Unit selling price 0.60 0.60 Expected sales levels (units) 160,000 160,000 Which firm has higher operating gearing? What is the expected net income of both firms? What would expected net income be for both firms if sales were a) 140,000 units and b) 180,000 units? Which firm is facing more risk in terms of its current sales predictions? – Launch of a new product.

2. Solved: The following information is about two organisations, A and B.

Organisation A | Organisation B | |

£ | £ | |

Fixed costs | 60,000 | 12,000 |

Variable costs per unit | 0.2 | 0.5 |

Unit selling price | 0.6 | 0.6 |

Expected sales levels (units) | 160,000 | 160,000 |

- Which firm has higher operating gearing? What is the expected net income of both firms?
- What would expected net income be for both firms if sales were (a) 140,000 units and (b) 180,000 units?
- Which firm is facing more risk in terms of its current sales predictions?

Be sure to demonstrate your numerical workings.

**Solutions**

1 (a) At what level of price for the new product will the organisation break even?

Variable cost per unit = £30

Fixed costs = £250,000

b (in terms of price) = ?

Total sales revenue = fixed costs + total variable costs

50,000 units x b = £250,000 + (£30 x 50,000)

b = (250,000+ 1,500,000)/50,000

Break-even price = Read more …..

b) If the actual planned selling price is £48 per unit, what will be the organisation Read more ….

2 a) Which firm has higher operating gearing?

An activity with relatively high fixed costs compared with its variable costs has a high operating gearing (Atrill and McLaney 2006, p. 229). According to Cima Global (2006), one way of determining operational gearing is by evaluating the contribution-to-sales ratio (C/S ratio). A low C/S ratio indicates that a business has low proportion of fixed costs and vice versa (Cima Global, 2006).

The contribution per unit for organisation A is £0.4 (0.6-0.2) while that for organisation B is £0.1 (0.6-0.5).

Contribution‑to‑sales ratio = (Contribution per unit / Sales price per unit) as a percentage

Contribution-to-sale ratio for:

Organisation A = (0.4/0.6) x 100= 67%

Organisation B = (0.1/0.6) x 100= 17% Read more …

b) What is the expected net income of both firms? Read more ….

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