Intermediate: Impact of a product abandonment decision and CVP analysis

(a) Budgeted information for A Ltd for the following period, analysed by product, is shown below:

General fixed costs, which are apportioned to products as a percentage of sales, are budgeted at £1 668 000.
Required:
(i) Calculate the budgeted profit of A Ltd, and of each of its products. (5 marks)
(ii) Recalculate the budgeted profit of A Ltd on the assumption that Product III is discontinued, with no effect on sales of the other two products. State and justify other assumptions made. (5 marks)
(iii) Additional advertising, to that included in the budget for Product I, is being considered.
Calculate the minimum extra sales units required of Product I to cover additional advertising expenditure of £80 000. Assume that all other existing fixed costs would remain unchanged.

(iv) Calculate the increase in sales volume of Product II that is necessary in order to compensate for the effect on profit of a 10% reduction in the selling price of the product. State clearly any assumptions made. (5 marks)

(b) Discuss the factors which influence cost beha¬ viour in response to changes in activity.

Transcribed Image Text:

Product Product Product I II III Sales units (000s) 225 376 190 Selling price ( per unit) 11.00 10.50 8.00 Variable costs ( per unit) 5.80 6.00 5.20 Attributable fixed costs (000s) 275 337 296