Essay About Total Q And Profit390,000Average Cm

The Widget Company Makes and Sells to Products, the Alpha and Beta. Below Is the Budgeted Profit Statement
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The Widget Company makes and sells to products, the Alpha and Beta. Below is the budgeted profit statement.AlphaBetaTotalunits40,00050,00090,000£££Sales1,000,0002,000,0003,000,000Materials(600,000)(1,000,000)(1,600,000)Labour(240,000)(450,000)(690,000)Contribution160,000550,000710,000Fixed overheads(320,000)Profit390,000The company is considering investing in some new machinery. It is expected to decrease unit material costs by £3 on the Alpha and £2 on the Beta. Labour costs are expected to decrease by £3 on the Alpha and £4 on the Beta. The machinery will cost £530,000.RequirementsRecalculate the profit, assuming the investment in machinery goes ahead.Calculate the margin of safety (%) before and after the investment in machinery Comment on whether you think the business should go ahead with the investment, mentioning any other factors to considerSolution BeforeUnit Level AlphaBetaTotalAlphaBetaunits40,00050,00090,000£££££Sales1,000,0002,000,0003,000,0002540Materials(600,000)(1,000,000)(1,600,000)(15)(20)Labour(240,000)(450,000)(690,000)(6)(9)Contribution160,000550,000710,000411Fixed overheads(320,000)Profit390,000Average CM = (Q_A/total Q)*CM_A+(Q_B/total Q)*CM_B= (40/90)*4+(50/90)*11 =7.8889Average Price = (Q_A/total Q)*P_A+(Q_B/total Q)*P_B = (40/90)*25+(50/90)*40 =33.3333£Breakeven in units = Total Fixed Cost / Average CM = 320,000/7.8889= 40563Breakeven in £ = Breakeven in units * Average Price = 40,563*33.333 =1,352,113£Margin of Safety = (Sales – BE in £)/Sales = (3,000,000-1,352,113)/3,000,000 = 55%AfterUnit Level AlphaBetaTotalAlphaBetaunits40,00050,00090,000£££££Sales1,000,0002,000,0003,000,0002540Materials(480,000)(900,000)(1,380,000)(12)(18)Labour(120,000)(250,000)(370,000)(3)(5)Contribution400,000850,0001,250,0001017Old fixed overheads(320,000)Machinery (530,000)400,000Average CM= (Q_A/total Q)*CM_A+(Q_B/total Q)*CM_B= (40/90)*10+(50/90)*17= 13.8889Average Price = (Q_A/total Q)*P_A+(Q_B/total Q)*P_B = (40/90)*25+(50/90)*40 =33.3333£Breakeven in units = Total Fixed Cost/Average CM =(320,000+530,000)/13.8889=           61,200 Breakeven in £ = Breakeven in units * Average Price = 61,200*33.333 =        2,040,000 £Margin of Safety = (Sales – BE in £)/Sales = (3,000,000-2,040,000)/3,000,000 = 32%Although profit has increased, the venture is a little riskier. Attitude to risk will play a part in the final decision to invest in machinery