Advanced: CVP analysis and changes in product mix Dingbat Ltd is considering renting additional factory space to make two products, Thingone and Thingtwo. You are the company’s management accountant and have prepared the following monthly budget:

The fixed overheads in the budget can only be avoided if neither product is manufactured. Facil¬ ities are fully interchangeable between products.
As an alternative to the manual production process assumed in the budget, Dingbat Ltd has the option of adopting a computer-aided process. This process would cut variable costs of production by 15% and increase fixed costs by £12000 per month.
The management of Dingbat Ltd is confident about the cost forecasts, but there is considerable uncertainty over demand for the new products.
The management believes the company will have to depart from its usual cash sales policy in order to sell Thingtwo. An average of three months credit would be given and bad debts and adminis¬ tration costs would probably amount to 4% of sales revenue for this product.
Both products will be sold at the prices assumed in the budget. Dingbat Ltd has a cost of capital of 2% per month. No stocks will be held.
Requirements:

(a) Calculate the sales revenues at which opera¬ tions will break-even for each process (manual and computer-aided) and calculate the sales revenues at which Dingbat Ltd will be indifferent between the two processes:
(i) if Thingone alone is sold; (4 marks)
(ii) if Thingone and Thingtwo units are sold in the ratio 4:1, with Thingtwo being sold on credit. (6 marks)

(b) Explain the implications of your results with regard to the financial viability of Thingone and Thingtwo. (5 marks)

(c) Discuss the major factors to be considered in the pricing and sales forecasting for new productions.LO1

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Thingone Thingtwo Total Sales (units) 4000 2000 6000 () () () Sales revenue 80 000 100 000 180 000 Variable material and labour costs (60 000) (62 000) (122 000)