The budgeted profit is not satisfactory and there are various proposals for how the position could be improved.

1. The managing director would like to know the position if selling prices were increased by 7.5% and an additional

$40,000 was spent on advertising to maintain the present budgeted output.

2. The production director feels the answer is an increased output. The sales director states that he could have the factory working at 100% capacity if he were allowed to reduce selling prices by 5%. He wishes to know what profit would be gained under these conditions and at what level of output the company would break even.

3. The marketing director is opposed to proposal 2. She considers that more should be spent on sales promotion. She estimates that a sales promotion costing $15,000 would result in sales of 400,000 units per annum. She wishes to know what profit this would achieve, and the maximum amount she could spend to achieve the desired sales level without reducing profit below the $4,000 budgeted.

4. The sales director also reports that a European distributor is quite willing to take 100,000 units per annum, provided a reasonable selling price can be agreed. The quality required, however, would involve increased factory variable costs of 12.5¢ per unit, and the company would pay half the distribution costs (estimated to total $30,000 per annum). No sales commission would, however, be payable. What is the minimum price at which the proposal could be accepted?

What factors should be taken into account to determine the finally agreed price?

Questions 1. Calculate the break-even point on the basis of the budgeted figures.
2. Prepare statements answering all of the points raised, and comment on each one.
3. Identify the behavioural factors that are likely to be driving each of the proposals, and consider how you might deal with these.