KK Pty Ltd is a small manufacturing business. For the year ending 30 June 2016, the company achieved sales of $2772000 and a gross profit margin of 30%. Although satisfied with this result, management was, however, keen to increase the company’s performance in the following year. Management was considering adjusting the unit price of its product, currently $6, to achieve a better outcome. It is considering two alternative strategies.

Under Strategy One, the selling price would be increased by 50 cents, but it is expected that this increase would result in a decrease of 15% in sales volume (units) for the year, and inventory at 30 June 2017 would be equal to 4% of the units sold during the year. Strategy Two is to decrease the selling price by 50 cents, which is expected to lead to an increase in sales of 30000 units, and result in 20000 units being on hand at 30 June 2017. Inventory on hand at 1 July 2016 was 15000 units.

Projected cost data for the year ended 30 June 2017 are:

Direct materials Direct labour Overheads —   variable                         fixed

$1.20 per unit $0.80 per unit $0.80 per unit $600000

Required

A. Prepare a sales budget and a production budget for the year ending 30 June 2017 under both strategies. 

B. Which strategy should management adopt? Why?