7/23/2019 Stplc Week 35 Solutions

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T plc – outline solution

a. Original Budgeted Income Statement £m

Tplc A B C

Sales 100 40 30 30

TVC 65 30 15 20

Contribution 35 10 15 10

TFC 20

Profit 15

Proposed Income Statement £m

Tplc A B C

Sales 100 20 50 30

TVC 60 15 25 20

Contribution 40 5 25 10

TFC 20

Profit 20

Break-even point formula:

TFC * Sales

Contribution

Original = 20 * 100 = £57.143m (sales value)

35

Proposal = 20 * 100 = £50m (sales value)

40

7/23/2019 Stplc Week 35 Solutions

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Margin of Safety formula:

Actual Sales – Sales @ B.E.P.

Original = 100 – 57.143 = £42.857m (sales value)

Proposal = 100 – 50 = £50m (sales value)

Contribution to sales ratio formula:

Contribution * 100

Sales

Original = 35 * 100 = 35%

100

Proposal = 40 * 100 = 40%

100

b. Yes, accept Marketing Directors proposal:

• higher contribution and profit

• lower break even point

• higher margin of safety

• higher contribution to sales ratio

So, overall: higher profit and profitability with lower risk.

c. Non-financial factors:

• on-going demand from customers

• no reaction from customers to reduction in Product A

• availability of supplies, production capacity and abilities, channels of 

distribution.