Company ZZZ sells two products B and A with contribution margin ratios of 40 and 30 per cent and selling prices of sh.5 and sh.2.50 a unit. Fixed costs amount to sh.72,000 a month. Monthly sales average 30,000 units of product B and 40,000 units of product A.

Required:

1. Assuming that three units of product B are sold for every four units of product A, calculate the sales volume necessary to breakeven, in shillings and in units. (5 marks)
2. Calculate the margin of safety in sales shillings (3 marks)

If the company spends an additional sh.9,700 on advertising, sales of product B can be increased to 40,000 units a month. Sales of product A will fall to 32,000 units a month if this is done. Should this proposal be accepted? (6 marks)

1. Recalculate the breakeven point in shillings based on the figures in (iii) (3 marks)
2. State the condition that would have to hold true for the company to earn a zero profit at the breakeven volume you calculated in (iv) (3 marks)