Part 1: Answer the following review questions in your own words:
* Why do we have to know about operating gearing of the business and how does it impact business operations?
**3.1 Is it always reasonable to assume linear relationships between volume and sales revenue/ variable cost, even where the activity is within a fairly narrow range?
***3.2 Modern businesses tend to have higher levels of operating gearing than businesses had, say, 50 years ago. Why would this be the case?
Part 2: Answer the following calculation questions:
*Chapter 3 Practice Questions 1 & 2 (Available under Week 3) – only attempt Q2
*End of Chapter 3 Exercise: 3.1
Motormusic Ltd makes a standard model of car radio, which it sells to car manufacturers for £60 each. Next year the business plans to make and sell 20,000 radios. The business’s costs are as follows:
Variable materials £20 per radio
Variable labour £14 per radio
Other variable costs £12 per radio
Fixed cost £80,000 per year
Administration and selling
Variable £3 per radio
Fixed £60,000 per year
(a) Calculate the BEP for next year, expressed both in quantity of radios and sales value.
(b) Calculate the margin of safety for next year, expressed both in quantity of radios and sales value.
(c) Calculate units if target profit £110,000 to be achieved per year.