Reference no: EM132955253

Question - 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:

Costs per month $

Materials 4,100

Labour 5,000

Production overheads 2,000

Selling and distribution overheads 1,000

Administration overheads 500

The above costs are based on producing and selling 1200 pairs of curtains per month at a selling price of $15 each.

80% of labour costs are fixed, as are 75% of production overheads, 60% of selling and distribution overheads, and 100% of administration overheads. All other costs vary directly with output.

Required -

a) How much profit she will make at the proposed production level and selling price?

b) Calculate the break-even point at this selling price.

c) Calculate the margin of safety (in units and in %) if the proposal is adopted. Briefly comment on your answer.

d) If sales are slower than expected, by how much can she reduce her selling price in order to maintain the budgeted level of sales, without making a loss?

e) Identify and explain the underpinning assumptions attached to the break-even model. Discuss whether the model can successfully be utilised by a range of differing businesses.