Finance Project 2: Cost Analysis and Break-Even Point Analysis

This finance project provides a detailed financial analysis for two different scenarios: Sheila's Kitchen and Broad's manufacturing. The project begins with the preparation of income statements and balance sheets for Sheila's Kitchen, followed by a manufacturing account and income statement for Broad's manufacturing. It includes calculations for the break-even point, contribution margin, and margin of safety, along with an analysis of the impact of different production levels on profitability. The project also explores the difference between prime and conversion costs and calculates the number of units needed to achieve a desired profit. Finally, the project analyzes variable and fixed costs related to pizza production and their impact on cost per unit.

Finance Project 2

TABLE OF CONTENTS
QUESTION 1..................................................................................................................................3
a. Preparing income statement for Sheila’s Kitchen for the period ended 30 June 20X6...........3
b. Prepare the balance sheet for Sheila’s Kitchen as at 30 June 20X6........................................3
QUESTION 2..................................................................................................................................5
a. Manufacturing or trading account............................................................................................5
b. Income statement.....................................................................................................................6
c. Difference between prime and conversion cost.......................................................................7
QUESTION 3..................................................................................................................................7
a. Calculating selling price, variable cost and contribution per unit for 20X2............................7
b. Computation of break-even point............................................................................................8
c. Contribution analysis...............................................................................................................8
d. Analyzing outcome with the help of break-even chart............................................................9
e. Calculating the number of screen protectors needed to be sold for earning a profit of
£100,000......................................................................................................................................9
f. Calculating margin of safety for Smart Screen for 20X2.........................................................9
QUESTION 4..................................................................................................................................9

QUESTION 1
a. Preparing income statement for Sheila’s Kitchen for the period ended 30 June 20X6.
Profitability statement for Sheila’s Kitchen for the period ended 30 June 20X6.
Income statement
Particulars Figures (in £) Figures (in £) Figures (in £)
Sales 375,000
375,000
Less: COGS 134,800
Carriage inward 7000 141,800
Gross profit (GP) 233,200
Income from franchise 14,000
Profit on the sale of equipment 7,000
Total operating income 254,200
Rent 44,000
Less: Prepaid rent 1,600 42,400
Advertising expense 5,700
Less: Prepaid expenses 1,300 4,400
Heating and lighting 25,000
Add: Outstanding expenses 3,500 28,500
Motoring expenses 7,000
Wages 17,000
Discounts allowed 3,500
Carriage outward 2,500
Depreciation on the motor
vehicle 12,000
Depreciation on the equipment 19,200
Bad debts 1600
add: allowances for receivables 576
Less: old provision 1200 976
Interest on loan 1200
Total operating expense 138,676
Net profit (NP) 115,524
b. Prepare the balance sheet for Sheila’s Kitchen as at 30 June 20X6
Statement of Financial Position

Particulars Figures (in £) Figures (in £)
Current assets:
Cash 11000
Bank 32,000
Less: Repayment of loan 4,000 28,000
closing inventory 36200
Prepaid rent 1,600
Prepaid advertisement expenses 1300
Receivables 16,000
less: bad debt 1600
Less: new provision 576 13,824
Total current assets 91924
Fixed assets
Motor vehicle at cost 64,000
Less: Motor vehicle – accumulated depreciation 16,000
Less : Depreciation @ 25% 12,000 36,000
Equipment at cost 96,000
Equipment – accumulated depreciation 24,000
Less: Depreciation 19,200
Less: Sales of equipment 22000 30,800
Total fixed assets 66,800
Total assets (current + fixed) 158,724
Liabilities
Current liabilities
Outstanding electricity expenses 3500
Interest payable 1200
VAT liability 3,700
Payables 18,400
Total current liabilities 26800
Long-term loan 20,000
Less: Repayment of loan 4,000 16,000
Capital 50,000
Less: Drawings 49,600
Add: NP 115524 115,924
Total liabilities and owners capital 158724

QUESTION 2
a. Manufacturing or trading account
Manufacturing account for Broad’s manufacturing for the year ended 31 December 20X3
Particulars
Figures (in
£)
Figures (in
£)
Sales of finished goods 675,000
add: Closing stock 80000 755,000
Less: Purchase and direct expenses
Purchases of raw materials 134,000
Wages to factory workers 63,000
Direct expenses 16,000
Factory rates 3,000
Energy costs 15400
Telephone 2340
Depreciation on equipment 16500
Other manufacturing overhead expenses 4,000 254,240
Gross Profit 500,760
Working note: 1
Particulars Manufacturing Figures (in £)
Depreciation of equipment 55% 30000 * 55% =
16500
Depreciation of motor vehicles 0% NIL
Motor expenses 0% NIL
Energy costs 70% 22000 * 70% =
15400
Telephone 30% 70%

b. Income statement
Profitability statement for Broad’s manufacturing for the year ended 31 December 20X3\
Particulars
Figure
s (in £)
Figure
s (in £)
Net
Figure
s (in £)
Gross Profit
500,76
0
Wages to supervisors 35,000
Factory maintenance costs 18,000
Machine repairs 7,500
Motor expenses 8,300
Energy costs 6,600
Telephone 5,460
Other selling and administration overhead expenses 18,000
Depreciation on motor vehicle 15000
Depreciation on equipment 13500
Interest payable on loan 5200
Bad debt 1200
Add: New provision 2940
Less: Old provision 4000 140
Total indirect expenses
132,70
0
Net profit margin
368,06
0
Working note: 2
Calculation of depreciation
Particulars Figures (in £) Figures (in £)
Equipment at cost 120000 120000 * 25% = 30000

Motor vehicles 60000 60000 * 25% = 15000
Working note: 3
Computation of indirect expenses
Particulars Selling & Admin Figures (in £)
Depreciation of equipment 45% 30000 * 45% = 13500
Depreciation of motor vehicles 100% 15000
Motor expenses 100% 8,300
Energy costs 30% 22000 * 30% = 6,600
Telephone 70% 7800 * 70% = 5,460
c. Difference between prime and conversion cost
Basis of difference Prime cost Conversion cost
Meaning It includes direct cost that can be
easily or conveniently traced to
each unit.
Conversion costs are the one that
includes manufacturing costs
other than direct material
expenses.
Types of cost consideration or
inclusion
Direct material and labor Direct labor and manufacturing
overhead cost
QUESTION 3
a. Calculating selling price, variable cost and contribution per unit for 20X2.
Particulars Formulas Figures (in £)
Sales 484000
Profit 73200

Units sold 225,000
Fixed cost 94000
Total Cost Sales – profit margin 410800
Variable cost Total cost – fixed cost 316800
variable cost per unit
(VPU)
Total variable cost / Total number of
units 1.41
Selling price per unit
(SPU) Sales revenue / total number of units 2.15
Contribution per unit SPU - VPU 0.74
b. Computation of break-even point
Figures (in £)
Fixed cost 94000
Selling price per unit 2.15
Contribution per unit 0.74
BEP in units
Fixed cost / contribution per
unit 126495.2
BEP in value BEP in units * selling 272105.3
c. Contribution analysis
Particulars /
number of units 0 150000 250000
Fixed cost 94000 94000 94000
Variable cost 0 211200 352000
Total cost 94000 305200 446000
Cost per unit 0 2.03 1.78
Profit 0.33 0.33 0.33
Selling price per unit Nil 2.36 2.11
Sales revenue Nil 354000 527500
Variable cost per unit Nil 1.41 1.41
Contribution per unit Nil 0.95 0.70
BEP (in units) Nil 98739 134030

BEP (in value) Nil 233025.2 282714.8
d. Analyzing outcome with the help of break-even evaluation
Considering overall evaluation, it can be depicted that Smart Screen should focus on
manufacturing and selling 150000 units which in turn helps it in attaining BEP earlier over other
alternatives available.
e. Calculating the number of screen protectors needed to be sold for earning a profit of £100,000
Particulars Figures
Fixed cost £94000
Desired profit £100000
Contribution per unit £0.74
Protectors need to be sold for earning desired profit
margin 261065
f. Calculating margin of safety for Smart Screen for 20X2
Particulars / units 225,000 150000 250000
actual sales £484000 £354000 £527500
BEP sales £272105 £233025.2 £282714.8
Margin of safety £211895 £20974.8 £244785
QUESTION 4
No of
pizzas
sold
10,000 12,000
Cost
items
Cost Cost Chang
e in
cost
Change
inc.
cost/chang
e in
quantity
TVC
for
10,00
0 units
TVC
for
12,00
0 units
Fixe
d
cost
Cost
type
£ £ £ £ £ £ £