Reference no: EM133016870
Question - Wheelies ltd manufactures and sells bicycles and is considering subcontracting out the manufacture of their Christmas promotional bicycle, the X4. The directors have forecast sales of the X4 to be 5,000 units, however the directors have taken an optimistic and baseless approach to the sales forecasts. The X4 could be manufactured in-house and details of the selling price and costs of manufacturing in-house and subcontracting are summarised below:
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X4 (in-house) £
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X4 (Subcontract) £
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Selling Price
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300
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300
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Variable Costs:
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Labour costs
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75
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-
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Material costs
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150
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-
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Delivery costs
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-
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10
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Fixed Production Costs:
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Separable Overhead cost allocation
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10
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220
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Shared Overhead cost allocation
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20
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20
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REQUIRED -
a) Calculate the expected total profit, breakeven volume, margin of safety, gearing sensitivity and operational gearing for the X4 for both in-house manufacturing and sub-contracting out the manufacturing.
b) Assuming Wheelies ltd is a young fast growing business and has limited cash resources, with a priority to manage risk and to avoid a financial loss, advise with reasons and using calculations from part "a" to illustrate which manufacturing option, if any, Wheelies ltd should accept. In order for your advice to change what would have to be different?
c) Explain the difference between shared and separable fixed costs and explain three factors that should be taken into consideration before deciding to subcontract out in-house operations.
d) Using calculations from part "a", explain the relationship between operational gearing and profit sensitivity and explain why operational gearing impacts profit sensitivity.
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: Calculate the expected total profit, breakeven volume, margin of safety, gearing sensitivity and operational gearing for the X4
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