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Gattonside Gumbo Company

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See attachment for company information. Thanks.

(a) State five assumptions which are made when preparing break-even charts. State one limitation of each assumption.

(b) Using marginal costing, calculate the net profit if
i) 7500 units are produced and sold;
ii) 9000 units are produced and sold.

(c) Calculate the number of units required to break-even.

(d) Calculate the expected profit at full production capacity assuming all production is sold, if selling price is reduced to $9 per unit.

(e) Comment on the possible advantages and disadvantages of lowering a selling price.

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The solution determines the break-even, expected profit at full production capacity and lowering a selling price for the Gattonside Gumbo Company.

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3 (a) State five assumptions which are made when preparing break-even charts.

State one limitation of each assumption.

Assumptions:
1. Changes in the level of revenues and costs arise only because of changes in the number of product units produced and sold
a. Limitation: There may be other factors which can drive costs and revenues such as better customer service, learning curve efficiencies etc.
2. Total costs can be divided into a fixed and variable component with respect to level of output.
a. Limitation: In pure terms no cost can be classified as fixed or variable. There is some element of variability in fixed costs and some element of fix in variable costs. The assumption of variable and fixed works only in a very narrow range of output.
3. The ...

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