Intermediate: Decision-making and non-graphical CVP analysis Mr Belle has recently developed a new improved video cassette and shown below is a summary of a report by a firm of management consultants on the sales potential and production costs of the new cassette.

Sales potential: The sales volume is difficult to predict and will vary with the price, but it is reasonable to assume that at a selling price of £10 per cassette, sales would be between 7500 and 10000 units per month. Alternatively, if the selling price was reduced to £9 per cassette, sales would be between 12 000 and 18 000 units per month.

Production costs: If production is maintained at or below 10000 units per month, then variable manufacturing costs would be approximately £8.25 per cassette and fixed costs £12125 per month. However, if production is planned to exceed 10 000 units per month, then variable costs would be reduced to £7.75 per cassette, but the fixed costs would increase to £16125 per month.

Mr Belle has been charged £2000 for the report by the management consultants and, in addition, he has incurred £3000 development costs on the new cassette.

If Mr Belle decides to produce and sell the new cassette it will be necessary for him to use factory premises which he owns, but are leased to a colleague for a rental of £400 per month. Also he will resign from his current post in an electronics firm where he is earning a salary of £1000 per month.

Required:

(a) Identify in the question an example of

(i) an opportunity cost,

(ii) a sunk cost. (3 marks)

(b) Making whatever calculations you consider appropriate, analyse the report from the consultants and advise Mr Belle of the poten¬ tial profitability of the alternatives shown in the report.

Any assumptions considered necessary or matters which may require further investiga¬ tion or comment should be clearly stated.

LO1