Clearly show the valuation of any stock figures. (c) Which of the two costing principles (absorption or marginal) is more relevant for short-run decision- making, and why? (4 marks) QUESTION 4 CVP ANALYSIS 30 MARKS The following monthly data in contribution statement format are available for Palesa Company and its only product, a board game called The Alphabet: Total Per unit R R Sales 83 700 279 Variable expenses (32 700) (109) Contribution margin 51 000 170 Fixed expenses (40 000) Net operating income 11 000 The company produced and sold 300 units during the month and had no beginning or ending inventories. Required: 1. For the above information, calculate the break-even point by using the contribution margin method. Also calculate the operating leverage. (6 marks) 2. Management is thinking of using plastic rather than mental letters in its alphabet game. This change would reduce variable expenses by R18 per unit. The company's sales manager predicts that this would reduce the overall quality of the product and would result in a decline in sale to a level of 250 units per month. Should this change be made? Use a contribution income statement to illustrate what the effect will be. (8 marks) 3. Assume that Palesa Company is currently selling 300 units of its game per month. Management wants to increases sales and feels this can be done by lowering the selling price by R22 per unit and increasing the advertising budget by R20 00 per month. Management believes that these actions will increase unit' sales by 50%. Should these changes be made? Show the effect of the change on the break-even point by using the contribution margin method. (8 marks) 4. Assume that Palesa Company is currently selling 300 units of its game. Management wants to automate a portion of the production process. The new equipment would reduce direct labour costs by R20 per unit, but would result in a monthly rental cost for the new equipment of RIO 000. Management believes that the new equipment will increase the monthly sales of the game by 12%. Should these changes be made? Illustrate the effect of the change by using an incremental contribution income statement. (8 marks) NB: please round all figures to the nearest full amount. 5