• April 20th, 2016

Magic Carpets Ltd Report

Paper, Order, or Assignment Requirements

Magic Carpets Ltd is planning to manufacture machine made Persian rugs that they hope to sell online nationally and have identified the following plans:

Per rug
Direct labour: 14 hours at £21.00 per hour
Direct materials: £142
Other Variable costs: £31

They anticipate monthly fixed costs to be £160,000 and have recently determined that the selling price of the rug will be £640, with planned sales of 1500 rugs per month.

Required: Produce a report for the Board of Directors of Magic Carpets Ltd in which you identify:

a) The variable cost per rug sold (5 marks)

b) The number of rugs that need to be sold monthly to break even. (5 marks)

c) The margin of safety and monthly profit at the forecasted sales level. Explaining clearly the meaning of these results to the management. (5 marks)

d) The number of rugs that need to be sold each month to earn the target monthly profit of £120,000. (5 marks)

e) If the company takes the option to hand make these rugs using pure silk and increase the labour time, the direct labour hours required per silk rug would increase by 4 hours, direct material per rug would increase to 160, but it is anticipated that the selling price could increase to £740.00. What would be the implications on the break-even point and margin of safety if this opportunity was taken up by the management of the company? What would be your advice to the management of the company about this option? (15 marks)

f) Advise the management of Magic Carpets Ltd on the main assumptions underpinning the use of break-even analysis for planning purposes and the reliability of your findings. (10 marks)

(750 Words)


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