A company sells two products that are manufactured, using different machines. The budget for next year has been finalised and shows:-

Product A Product E Total

Sales units 150 000 100 000

000 000 000

Sales 22 500 12 000 34 500

Variable costs 9 000 4 400 13 400

Fixed costs 7 500 4 000 11 500

Profit 6 000 3 600 9 600

The estimated fixed costs were apportioned to products on the basis of direct labour hours. It was expected that 575 000 direct labour hours would be worked during the year and so this means that the overheads were apportioned to products at a company-wide rate of 20 per direct labour hour.

Required

1. Assess each of the following three alternative courses of action

(i) Increase the selling price of both products by 10% per unit but this is expected to reduce the demand by 8%.

2. Improve the quality of both products. This will increase the units sold by 5%. However, it will also increase the variable costs by 1 per unit. The selling price would not be changed.

(b) As a result of production problems, the production hours for the year have been reduced to 450 000 hours. What quantity of each product should be produced to maximise the companys profit?

(c) A firm in the same industry could supply both products of a good quality standard. The prices quoted are 80 per unit for Product A and 50 per unit for Product E. What should be done to maximise the profit and not be forced to cancel any orders.

1. If the sales of the products are always in the ratio of 3 units of A to 2 units of E, what is the break-even point of the company

2. Discuss the usefulness of break-even analysis especially in terms of the assumptions that are made in determining the break-even point of a company.