A firm is selling X product, whose variable cost per unit is Rs.10 and fixed cost is Rs.6000. It has sold 1000 articles during one month at Rs.20 per unit. Market research shows that there is a great demand for the product if the price can be reduced. If the price can be reduced to Rs. 12.50 per unit, it is expected that 5000 articles can be sold in the expanded market. The firm has to take a decision whether to produce and sell 1000 units at the rate of Rs.20 or to produce and sell for the growing demand of 5000 units at the rate of Rs. 12.50. Give your advice to the management in taking decision. S12 Comparative Profit Statement Existing Situation Proposed situation Sales 1000 units Sales 5000 units @Rs 20 per unit @Rs. 12.50 per unit Sales 20000 62500 Less - Variable Cost 10000 50000 Contribution 10000 12500 Less - Fixed Cost 6000 6000 Profit 4000 6500 The above analysis shows that the proposal to manufacture and sell 5000 units will be profitable. The profit will increase by more than 50%. However the management should also consider interest on increased capital outlay and increase in fixed costs, if any, before arriving at final decision. Problem No.3 Quality products limited, manufactures and markets a single product. The following data are available. Materials Rs. 16 per unit Conversion Costs (variable) Rs.12 per unit Fixed Cost Rs.5 Lakhs Present sales 90000 units Capacity utilization 60% Dealer's Margin Rs.4 per unit Selling Price Rs.40 There is acute competition. Extra efforts are necessary to sell. Suggestions have been made for increasing sales: 1. By reducing sales price by 5% 2. By increasing dealer's margin by 25% over the existing rate Which of these two suggestions you would recommend it the company desires to maintain the present profit? Give reasons