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 advertising 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 1s:

Product A 460 000 units Product B 1 000 000 units Product C 380 000 units If £60000 per annum was to be invested in advertising and sales promotion, sales of Product A at reduced selling prices would be expected to be:
590000 units at £2.75 per unit or 650000 units at £2.55 per unit Annual fixed costs are currently £1 710 000 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 reduction, should be introduced on Product A.

(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.

Transcribed Image Text:

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