Norfolk Ltd is specialized in producing & selling air conditions. In 2010, the manufacturing cost per unit included: £Direct material 200Direct labor (20 minutes per unit) 90/hourVariable manufacturing overhead 30Variable selling expenses 50Variable administrative expenses 10Fixed costs for the year ended 31 December 2010 were: £000Fixed manufacturing 1,500Fixed selling and distribution 1,700Fixed administrative 800The company produced and sold 275,000 units at £400 per unit.
In 2011, management has decided to enhance the selling price by 15% and to maintain the similar contribution margin ratio as last year. This increase in price is to meet an increase of £2,440,000 in fixed costs in 2011. The company has produced and sold the similar quantity in 2011 as last year.1) Calculate the break-even point in units for the two years 2010 and 2011 and comment on the re sults (10%)
2) Calculate the safety margin for both years and comment on the results (5%)
3) In the light of your answer to the previous two points, evaluate the company's policy in increasing the price by 15% in 2011 (5%).