Reference no: EM133170086

Marab Sports Ltd

Marab Sports Ltd is a small specialist sports car manufacturer that has just been taken over by a private equity company. Marab has struggled over the last three years and the new owners have set the management a precise financial target for this year: to turn a $1.0 million loss into a $0.5 million profit. This is based on annual fixed costs of $2.8 million; a selling price of $50 000 per car and a direct cost of manufacturing each car of $20 000. The finance director believes the business can achieve a higher target profit the following year if direct costs can be reduced by 10%.

1. Define the term 'direct costs'.

2. Calculate the level of output needed to achieve the target level of profit this year and the following year assuming the 10% direct cost saving is achieved.

3. Analyse two ways Marab Sports could reduce its direct costs.