Questions
Question 1
DeltaTech PLC (DT) is a UK manufacturer of smart home devices. DT sells 10 million units of its entry model annually and is considering a price change.
The chart shows total costs (TC), total revenue at price £5 (TR₁) and total revenue at price £9 (TR₂). At 10 million units, TR₁ ≈ £50 million, TR₂ ≈ £90 million and TC ≈ £60 million. Assume fixed costs = £20 million and variable cost per unit is constant (all further calculations in £ and in units unless otherwise indicated).
Define the term margin of safety.
Determine the total revenue at 10 million units under:
(i) TR₁
(ii) TR₂
Using the information provided, calculate:
(i) the variable cost per unit;
(ii) the contribution per unit at £5 and at £9;
(iii) the break-even quantity (units) at each price (show all your working).
Comment on the impact of increasing price from £5 to £9 on profit at 10 million units and on DT’s margin of safety.