The safety margin, Financial Management

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Norfolk Ltd is specialized in producing & selling air conditions.  In 2010, the manufacturing cost per unit included:
                                                                              £
Direct material                                                       200
Direct labor (20 minutes per unit)                          90/hour
Variable manufacturing overhead                              30
Variable selling expenses                                        50
Variable administrative expenses                             10

Fixed costs for the year ended 31 December 2010 were:
                                                                          £000
Fixed manufacturing                                              1,500
Fixed selling and distribution                                 1,700
Fixed administrative                                               800

The 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%).


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