Calculation of break-even points and limiting factor decision-making

You are employed as an accounting technician by Smith, Williams and Jones, a small firm of accountants and registered auditors. One of your clients is Winter plc, a large department store. Judith Howarth, the purchasing director for Winter plc, has gained considerable knowledge about bedding and soft furnishings and is considering acquiring her own business.

She has recently written to you requesting a meeting to discuss the possible purchase of Brita Beds Ltd. Brita Beds has one outlet in Mytown, a small town 100 miles from where Judith works. Enclosed with her letter was Brita Beds’ latest profit and loss account. This is reproduced below.

Brita Beds Ltd

Profit and loss account — year to 31 May

Sales

(units)

Model A

1620

336960

Model B

2160

758160

Model C

1620

1010880

Turnover

2106000

Expenses

(£)

Cost of beds

1620 000

Commission

210 600

Transport

216 000

Rates and insurance

8 450

Light heat and power

10 000

Assistants’ salaries

40 000

Manager’s salary

40 000

2145050

Loss for year

39050

Also included in the letter was the following information:

1 Brita Beds sells three types of bed, models A to C inclusive.

2 Selling prices are determined by adding 30% to the cost of beds.

3 Sales assistants receive a commission of 10% of the selling price for each bed sold.

4 The beds are delivered in consignments of 10 beds at a cost of £400 per delivery. This expense is shown as ‘Transport’ in the profit and loss account.

5 All other expenses are annual amounts.

6 The mix of models sold is likely to remain constant irrespective of overall sales volume.