Problem 2 Tallulah Trott, a friend of yours, has recently set up a small busines

Question

Problem 2 Tallulah Trott, a friend of yours, has recently set up a small business making curtains. She has supplied you with the following figures, and has asked your advice on a number of issues Cost per Month 4,100 5,000 2,000 1,000 Labour Selling and distribution overheads Adminstration overbeads The above costs are based on producing and selling 1,200 pairs of curtains per month at a selling price of 15 each. 80% of labour costs are fixed, as are 7596 of production overheads, 609, of selling and d tribut on overheads, and 100% of administration overheads All other costs vary directly with output. Tallulah wants to know 1. How much profit she will make at the proposed production level and selling price? (2 mark 2. How many pairs of curtains she needs to sell to break even at this price? (3 mark 3. If sales are slower than expected, by how much can she reduce ber selling price in order to maintain the budgeted level of sales, without making a loss? (4 mari) 4. Tallulah estimates her maximum capacity as 1500 curtains would it be worthwhile dropping the price in order to increase sales to capacity? If so, by how much? (4ma 5. If Tallulah bought another machine, she could increase her production capacity to 2500 curtains. Repayments on the machine would be e700 per month, and she woald need an extra member of staff, costing 1000 per month. She would also have to pay a bonus to all staf of 50cents per curtain, over and above their current wages, and variable production overheads would increase by 30cents per pair of curtains. (6 marks) 6. In order to increase sales, she would have to reduce the price: she estimates demand at different price levels to be as follows Price 14 13 12 1,500 2,000 2.500 What would be the optimum price? (6 ak Required: Advise Tallulah on each of the above points (1 to 6), showing your calculations, explaining both the financial and non-financial implications of each, where appropriate (25 marks)

Explanation / Answer

1)

Hence. Tortt will make a profit of 5400 per month at the current level of sales.

2) Break even units

Break even units = fixed cost / contribution margin per unit

= 6600 / 10

= 660 units

3) In order to maintain the same lvel of sales and no loss, Trott can reduce her selling price to maximum 8.5.

At this level, her income statement is as follows:

Therefore, the selling price will have to fall by 6.5

4) To increase the sales level to 1500 curtains, Trott can reduce the selling price to 11 in order to maintain the same level of profit ar 1200 curtains.

Figures for 1500 curtains

Cost per month € Materials       4,100 Labour       5,000 Production overheads       2,000 Selling & distribution overheads       1,000 Administration overheads          500 Total cost    12,600 Revenue    18,000 Profit       5,400

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