Intermediate: Non-graphical CVP analysis and calculation of margin of safety Z Ltd manufactures and sells three products with the following selling prices and variable costs:

The company is considering expenditure on adver¬ tising and promotion of Product A. It is hoped that such expenditure, together with a reduction in the selling price of the product, would increase sales. Existing annual sales volume of the three products is:

Annual fixed costs are currently £1710000 per annum.
Required:

(a) Calculate the current break-even sales revenue of the business. (8 marks)

(b) Advise the management of Z Ltd as to whether the expenditure on advertising and promotion, together with selling price reduc¬ tion, should be introduced on Product A.
(6 marks)

(c) Calculate the required unit sales of Product A, at a selling price of £2.75 per unit, in order to justify the expenditure on advertising and promotion. (5 marks)

(d) Explain the term ‘margin of safety’, with particular reference to the circumstances of Z Ltd.LO1

Transcribed Image Text:

Product A Product B Product C (/unit) (/unit) (/unit) Selling price Variable cost 3.00 2.45 4.00 1.20 1.67 2.60