Automate Systems manufactures CD burners and currently sells 20,000 units annually to producers of laptop computers. Maxwell, president of the company, anticipates a 20 percent increase in the cost per unit of direct labor on January 1 of next year. He expects all other costs and expenses to remain unchanged. Maxwell has asked you to assist him in developing the information he needs to formulate a reasonable product strategy for next year.

You are satisfied that volume is the primary factor affecting costs and expenses and have separated the semi-variable costs into their fixed and variable segments. Beginning and ending inventories remain at a level of 1,00 units. Current plant capacity is 15,000 units.

Below are the current-year data assembled for your analysis:

		RM	RM
Sales price per unit			200
Variable cost per unit
	Direct materials	20
	Direct labour	50
	Manufacturing overhead and selling & administration expenses	30	100
Contribution margin per unit			100
Fixed costs			400,000

Required

(a) In anticipation of 20 percent increase of direct labor cost next year, evaluate the appropriate PRICING strategy that the Mr Maxwell need to implement in order to maintain the current contribution margin ratio of 30 percent. (7 marks)

(b) If however, the sales price is to be remained at current RM100 level and the 20 percent wage increase will still goes into effect, assess the sales volume the company need to achieve in order to maintain the current operating income of RM200,000. (7 marks)

(c) Maxwell believes that an additional RM 500,000 of machinery (to be depreciated at 10 percent annually) will increase present capacity (15,000 units) by 20 percent. If all units produced can be sold at the present price of RM 100 per unit and the wage increase goes into effect, compare and contrast the profitability of the company before and after the production capacity has been increased by constructing pro forma income statement.

(11 marks)

(Total: 25 marks)