19.8 Puzzled Limited would like to increase its sales during the year to 3l May 2005. To do so, it has several mutually exclusive options open to it:

1 reduce the selling price per unit by 15 per cent;

2 improve the product resulting in an increase in the variable cost per unit of £l.30;

3 spend £15000 on an advertising campaign;

4 improve factory efficiency by purchasing more machinery at a fixed extra annual cost of £22500.

During the year to 31 May 2004, the company sold 20 000 units. The cost details were as follows:

£000 Sales 200 Variable costs 150

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Contribution 50 Fixed costs 40

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Profit 10

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These cost relationships are expected to hold in 2005.

Required:

State which option you would recommend and why.