At the monthly senior management meeting of Hampshire plc on 1 May 2010, various suggestions were made to improve the profit to be made by selling the firm’s single product in the last quarter of the year ending 30 September 2010. The product is not subject to seasonable demand fluctuations, but there are several competitors producing similar items. In the first quarter of the year a suggestion was made that profit could be improved if the selling price was reduced by 5%, and this was put into effect at the beginning of the second quarter. As the new price undercut that of the rival firms, demand increased, and the firm’s breakeven point was reduced.The following suggestions have now been raised:i) Differentiate the product from its rivals by giving it a more distinctive shape, colour and packaging. This would increase material costs per unit by $0.30, but selling price would not be raised. Demand is then predicted to rise by 10%;ii) Improve the quality of the product by strengthening and giving it a one-year guarantee – material costs would then increase by $0.15 per unit and labour costs by $0.30 per unit. Selling price would rise by $0.40 per unit, and demand increase by 7%;iii) Further reduce the selling price by 10% – demand to rise by 20%;iv) Pay commission plus salaries instead of fixed salaries only to all sales staff. Variable selling costs would then rise by $0.20 per unit, but fixed costs would fall by $4,100 per quarter;v) Subcontract the making of some components, and close the department responsible, making six staff redundant at an estimated cost to the firm of $12,000. 30,000 components are currently made per quarter. Each component’s variable cost is $0.55. They can be bought from a recently established firm for $0.60 per unit. The department’s share of the firm’s fixed costs is 20% and $2,500 fixed costs per quarter would cease to arise if the department were to be closed.Data for: First quarter Second quarterNumber of units produced and sold 9,000 10,800$ $Selling price per unit 14 13.30Materials per unit 3.65 3.65Labour per unit 2.10 2.10Variable factory overhead per unit 1.40 1.40Variable selling costs per unit 0.85 0.85Fixed factory overhead 21,375 21,375Fixed selling and administrative costs 16,125 16,125

Required

a) Calculate the profit made in each of the first and second quarters, showing clearly the contribution per unit in each case. (10)

b) Calculate the breakeven points and the margins of safety for the first and second quarters. (05)

c) Taking each suggestion independently, calculate the profit that might be made in the last quarter if each of them were to be implemented.