1. Business organizations experience various types of costs and it is very important to analyse costs for business decision making.
2. 1. “Marginal cost” is a very important cost concept in business decision making. Explain briefly the meaning of Marginal cost. Why marginal cost is considered very important in business decision making? What are the main criteria that need to take into account in determining whether a cost is relevant for business decision making?
3. 2. A summary of a manufacturing company’s budgeted profit statement for its next financial year, when it expects to be operating at 70% of capacity, is given below.

£ £

Seles 7,000 units at £35 245,000

Less:

Direct material 42,000

Direct labour 56,000

Production overhead - fixed 40,000

• variable 14,000 152,000

Gross Profit 93,000

Less: admin, selling & distribution costs

• fixed 30,000
• variable 21,000 51,000

Net profit 42,000

The company has analyzed two more alternatives;

Alternative 1

If the selling price per unit were reduced to £30, the increased demand would utilize 90% of the company’s capacity without any additional fixed cost. Further, it has been estimated that due to the increased volume, direct material costs will reduce to £5 per unit.

Alternative 2

To attract sufficient demand to utilize full capacity would require a 20% reduction in the current selling price and a £5,000 special advertising campaign. Further, it has been estimated that due to the increased volume, direct material cost will reduce to £5 per unit and direct labour cost will reduce to £6 per unit.

Required,

1. Calculate the break-even point in units and margin of safety, based on the original budget and explain what is meant by that.
2. Calculate the break-even points and profits which would result from each of the two alternatives and compare them with the original budget stating clearly the best option for the company?
3. Sketch a profit-volume graph from the above information showing clearly the three options analyzed by this organization.
4. Explain the meaning of “limiting factor decision making” under CVP analysis and the process of selecting the best production mix stating clearly the other factors that should be considered in such a condition.