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Variable Costing

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Grantham Ltd is specialized in producing and selling washing machines. In 2012, the manufacturing cost per unit included: £ Direct material 125 Direct labor (20 minutes per unit) 45/hour Variable manufacturing overhead 20 Variable selling expenses 15 Variable administrative expenses 10 Fixed costs for the year ended 31 December 2012 were: £000 Fixed manufacturing 1,100 Fixed selling and distribution 1,450 Fixed administrative 675 The company produced and sold 220,000 units at £225 per unit. In 2013, management has decided to increase the selling price by 25% and to maintain the same contribution margin ratio as last year. This increase in price is to meet an increase of £1,450,000 in fixed costs in 2013. The company has produced and sold the same quantity in 2013 as last year. Required: 1)Calculate the break-even point and margin of safety in both units and revenue for the two years, 2012 and 2013, and briefly comment upon the results. (10%) 2)Analyze and critically evaluate the key assumptions attached to the breakeven model, within the light of the reality of today’s business environments. (15%)