The statement of profit or loss for Menage Industries for 2016 is as follows.

Cost behaviour seems to follow this pattern: all of the cost of sales is considered variable; 50 per cent of the total marketing and distribution costs are variable; and 40 per cent of the total administration costs are variable.

Required
a. Calculate the number of units that are needed to be sold in 2016 to break even.
b. The finance manager has developed a number of alternative plans to get the entity back into profitability. One of the plans relates to switching to a more reliable supplier of raw materials, which will increase the cost of sales per unit by $0.80. A change in marketing strategy will see variable marketing and distribution increase by $0.10, and fixed marketing and distribution decrease by $60,000. Competitive forces would allow an increase in selling price of only $0.50 per unit. On the information available, would you advise a switch to this alternative plan?
c. Prepare a statement of profit or loss for both alternatives given in (b).
d. Explain the concept of operating leverage as it relates to your answer in (b).

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Menage Industries Statement of profit or loss for year ending 31 December 2016 Sales revenue (200 000 units) Cost of sales Gross profit Operating costs Marketing and distribution Administration Profit (loss) $460 000 440 000 $2 000 000 1 200 000 800 000 900 000 $ (100 000)