Exercise What is the BEP for basket making for the business? FC = 500 v u = (2+10) s u = 14

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1 Exercise What is the BEP for basket making for the business? FC = 500 v u = (2+10) s u = 14 BEP (in number of units) = FC / CMu = FC / (Su - Vu) = 500 / (14-12) = 250 baskets a month 2. How much profit would the business make each month from selling 500 baskets Profit = (Total Revenue - TC) = (Q*Su) - FC - (Vu*Q) Estimated monthly profit from basket making: Without machine With machine Sales (500 x 14) 7000 (500 x 14) 7000 Materials (500 x 2) (-)1000 (500 x 2) (-)1000 Labour (500 x 10) (-)5000 0,5(500 x 10) (-)2500 Fixed costs 500 (-) (-)3000 Profit What is the BEP if the machine is rented? BEP (in number of units) = FC / CMu = FC / (Su - Vu) BEP without machine = 500 /(14-12) = 250 baskets a month BEP with machine = 3000 /(14-7) = 429 baskets a month

2 5. What advice would you give Cottage Industries about renting the machine? About the numbers: - both of strategies gain the same profit at the estimated sales volume - difference is between two strategies regarding the BEP: without the machine the actual volume of sales could fall by a half of that which is expected before the business would fail to make a profit; with the machine 14 % would be enough to cause the business to fail to make a profit. BUT - for each additional basket sold above the estimated 500, an additional profit (i.e. CMu = Su - Vu) without the machine: CMu = = 2 with the machine: CMu = 14-7 = 7 BEP and the planned volume of activity gives some basis for assessing the riskiness of the activity. Without machine With machine Volume Contribution ( ) (-) fixed costs = Profit Should the business accept the order? If the price offered will yield a contribution, business will be better off by accepting the contract than by refusing it. Additional revenue per unit 13 (-) marginal (variable) cost per unit (-) 12 Additional contribution per unit 1 Total contribution 300 x 1 300

3 Exercise 3.2 1) Service A B C Selling price per unit Variable cost per unit Contribution per unit Labour time per unit 5 hour 3 hours 6 hours contribution of an hour 5 6,67 5 To maximise profit, priority should be given to the production that maximises the contribution per unit of limiting factor. Service "C" yields the highest contribution per unit sold, but the ability to sell is not limiting factor. The ability to provide the service is limited by the availability of labour - most profitable is the service "B". 2) Service A B C Labour time per unit 5 hour 3 hours 6 hours labour time units produced contribution per unit total contribution

4 Exercise 3.3 1) Product A B C Selling price per unit ( ) Variable cost per unit ( ) Contribution per unit Machine time per unit Contribution per machine hour 3,75 4,00 2,75 weekly demand Combination: maximum of B Remaining hours for A Production of A 20 x 3 = 60 hours = 88 hours 88 / 4 = 22 units Result: The highest profit is gained if the company produces 20 units of product B and 22 units of product A. This leaves unsatisfied the market demand for a futher three units of product A and 30 units of product C. 2) If the 3 remaing "A" are subcontracted at no cost, the business gains a contribution of 15 a unit. any price up to 15 per a unit would be worth payed to a subcontractor to undertake the machinig. (The business would prefer to pay as little as possible). 3) Product "C": different contribution per unit - relevant figure in their case is 11.

5 Exercise 3.4 1) Smile company should produce the component internally, since the variable cost of subcontracting is grater by 5 than the variable cost of internal manufacture. 2) The answer is to subcontract. The relevant cost of internal producton of each component is: variable cost of production of the component 15 opportunity cost of lost production of the other produc This is obviously more costly than the 20 per component that will have to be paid to the subcontractor.

6 Exercise 3.5 Total in thousands Sports equipment Sports clothes General clothes Sales Costs (total) variable fixed Profit /(Loss) (-) 9 Profit (Loss) = contribution - fixed costs contribution contribution = sales - variable costs - there is a loss of the general clothes department, but it should not be closed, because it makes a positive contribution Negative impacts of closing the department: - would make the business worse off by the fixed costs would continue