Intermediate: Decision-making and non-graphical CVP analysis Fosterjohn Press Ltd is considering launchmg 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 magazine 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 additional marketing and distribution costs of selling the new magazine, are summarized below:

The following estimates have been obtained:

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 covenng related top1cs to those that will be Included in the new publication and consequently it is anticipated 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

(b) Calculate, for each production method, the amount by which sales volume of the new magazine could decline from the antic1pated 500 000 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.

Transcribed Image Text:

Variable costs 55p per copy Method A 50p per copy Method B Specific fixed costs 80 000 per month 120 000 per month Semi-variable costs: The following estimates have been obtained: 350 000 copies 55 000 per month 47 500 per month 450 000 copies 650 000 copies 65 000 per month 85 000 per month 52 500 per month 62 500 per month 62500