Question 19.7: Tilsy Limited You are presented with the following informati...
Tilsy Limited
You are presented with the following information.
| Product | A | B | C | Total |
| £ | £ | £ | £ | |
| Sales | 5000 | 20000 | 25000 | 50000 |
| Less: variable costs | \underline{3000} | \underline{10000} | \underline{12000} | \underline{25000} |
| Contribution | \underline{2000} | \underline{10000} | \underline{13000} | 25000 |
| Less: fixed costs | \underline{10000} | |||
| Profit | \underline{\underline{15000}} |
Additional information:
Assume that Tilsy first began manufacturing and selling Product A, then Product B, and finally Product C. Its fixed costs remained constant at £10 000 irrespective of whether it was dealing with one, two, or all three of these products.
Required:
Prepare a profit/volume chart showing the impact on its profit/(loss) of the individual product ranges.
1 If the Product A is the first product, the company makes a loss of £8 000 (£2 000 – 10 000). Once Product B is introduced, a profit of £2 000 is made (£10 000 – 8 000).
Then when Product C is added, the profit becomes £15 000 (£2 000 + 13 000).
2 It would be possible to plot the three product ranges in a different order, e.g. Product B, then Product C, then Product A or possibly Product C, then Product A, then Product B.
3 The disclosure of the impact of individual products on profit is useful because it can highlight the performance of a poorly performing product. Product A does make a small contribution of £2 000 (£5 000 – 3 000) but this is not sufficient to off-set the fixed costs of £10 000. It is only when Product B is introduced that the company begins to make a profit. The chart shows this fairly clearly.
