Reference no: EM132542928
Question - Sorting Ltd manufactures hats
The standard cost of producing each hat is:
Direct materials 8.00
Direct Labour 5.00
Variable production overheads 2.50
Total variable production costs 15.50
Annual fixed costs are £787,500 and the variable costs of selling per unit is £0.75
The selling price per hat is £25.00 and the sales volume for the current year is expected to be 120,000 units.
Since Sorting Ltd sells most of its hats to the United Kingdom it is considering adding a waterproof coating to all its hats as an additional cost of £1.25 per hat. It believes that this would increase the demand for its hats and considers that a new selling price of £28 would be appropriate. At this price demand is expected to be 130,000 hats. Fixed costs would increase by £195,000
Required -
(a) Using the current cost structure of each hat, calculate the break-even point in units and pounds-sterling.
(b) Calculate the effects on profit of the addition of the waterproof coating.
(c) Advise the Managing Director of Sorting Ltd on whether they should add the waterproof coating.