Intermediate: Decision-making and non- graphical CVP analysis Foster]ohn Press Ltd is considering launching a new monthly magazine at a selling price of £1 per copy. Sales of the magazine are expected to be 500 000 copies per month, but it is possible that the actual sales could differ quite significantly from this estimate.

Two different methods of producing the maga¬ zine are being considered and neither would involve any additional capital expenditure. The estimated production costs for each of the two methods of manufacture, together with the addi¬ tional marketing and distribution costs of selling the new magazine, are summarized below:

It may be assumed that the fixed cost content of the semi-variable costs will remain constant throughout the range of activity shown.
The company currently sells a magazine cover¬ ing related topics to those that will be included in the new publication and consequently it is antici¬ pated that sales of this existing magazine will be adversely affected. It is estimated that for every ten copies sold of the new publication, sales of the existing magazine will be reduced by one copy. Sales and cost data of the existing magazine are shown below:

Required:

(a) Calculate, for each production method, the net increase in company profits which will result from the introduction of the new magazine, at each of the following levels of activity:
500000 copies per month 400 000 copies per month 600 000 copies per month (12 marks)

(b) Calculate, for each production method, the amount by which sales volume of the new magazine could decline from the anticipated 500000 copies per month, before the company makes no additional profit from the introduction of the new publication.
(6 marks)

(c) Briefly identify any conclusions which may be drawn from your calculations.LO1

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Method A Method B Variable costs 0.55 per copy0.50 per copy Specific fixed costs 80 000 120 000 per month per month Semi-variable costs: The following estimates have been obtained: 350 000 copies 55.000 47 500 450000 copies 650 000 copies per month 65.000 per month 85.000 per month 52500 per month 62 500 per month per month