Summer Limited Company (SLC) manufactures special sink units for fitting to camper vans. The selling price of a sink unit is £115, and variable costs per unit are £45. SLC’s directors have met to discuss sales plans for the financial year 2022. There is very stiff competition in this industry, and they feel that it will be difficult to match the sales performance of 3,200 units for the financial year just ended, 2021. Also, fixed costs have recently risen substantially because of the implementation of the new UK law on special sinks. SLC expects to incur fixed costs of £210,000 in 2022, and the directors would like SLC to achieve a target profit of £140,000.
SLC is also involved in providing other various goods and services. In the files submitted with this case there is some meeting notes, which includes the following statements made by members of SLC’s management team:
- -Sales Department Manager suggested that ‘more units of a particular service could be sold if prices were lowered and, overall, this would result in increased profits.’
- -The head of the Budgeting Unit stated, ‘A budget is a forecast of what is expected to happen in a business during the next year.’
- Requirements:
- A. The management of SLC is asking you to use the relevant information provided in CASE 4 to calculate the following:
- 1. Break-even point in units and in sales revenue for SLC.
- 2. Margin of safety (in units) if SLC can sell 25% more units than in 2021.
- 3. Number of units SLC must sell to achieve its target profit.
- 4. If SLC is subject to UK’s corporate tax rate for the financial year beginning 1st April 2021, calculate SLC sales revenue to achieve its target profit after tax.
- B. Critically discuss (maximum 150 words) the suggestion by the Sales Department Manager that ‘more units of a particular service could be sold if prices were lowered and that, overall, this would result in increased profits.”
- C. Write a brief essay (maximum 150 words) to critically discuss the statement made by the Head of Budgeting Unit that ‘A budget is a forecast of what is expected to happen in a business during the next year.’
