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Question 16 Mike is the Managing Director of the Sporting Company. a small specialist manufacturer of fleece jackets. In recent years the business has suffered a decline in sales, and profits for the year ended 30 December 2015 were 15,200 You are provided with the following information: Sporting Company Limited Trading Profit and Loss Account Year ended 30 December 2015 E 200,000 Sales Revenue Cost of Goods Sold Direct materials Direct labour Variable overheads Fixed production overhead 20,000 70,000 10,000 40,000 140,000 20.000 Administration overhead Selling and Distribution overheads Sales commission 10,000 Delivery costs 10,000 Fixed costs 4,800 24.800 184.800 Profit 15.200 Sales for 2015 were 10,000 jackets at a selling price of 20 each. Sales commission is payable at 5% of sales, and delivery costs vary in accordance with the number of jackets sold. Direct materials and direct labour are vanable costs. Mike is considering two proposals aimed at improving profitability as follows: Reduce the selling price of jackets by 10% which Mike anticipates will lead to a 40% increase in demand 1) Enter into a contract with a mail order company to supply them with 2,500 jackets per year. The Sporting company would be required to contribute 6,000 per year towards the cost of producing a mail order catalogue, and additional packaging costs of 1 per jacket would be payable by the Sporting Company. The mail order company would transport all the jackets from the Sporting Company to its own warehouse, and no sales commission would be payable by the Sporting Company Mike anticipates that the existing sales of 10,000 per year would be unaffected if the mailorder jackets contract is undertaken Required: Calculate break-even sales at the 2015 level of activity. (2 marks b) Provide Mike with a financial evaluation of proposal (1) (3 marks c) Advise Mike what the minimum selling price should be under proposal with the mailorder company to ensure that the Sporting Company wil break-even on the contract (5 marks) Calculate the selling price required under proposal () to make a profit of 10,000 per year from the mal order contract alone. (2 marks e) Briefly advise Mke of the limitations of break-even analysis (3 mans) (Total 15 marks)

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