Edinburg Company Accounting information for planning and decision-making The Directors of Edinburg Company are planning for the next year (2020). They want to develop a strategic plan based on the capacity and opportunities of their business. The accountant provided the following forecast for 2020: Budgeted operating activities Sales - $ 800,000 Cost of sales (manufacturing costs) Materials 300,000 Labour 110,000 Variable overheads 50,000 Fixed overheads 60,000 $ 520,000 Selling LLL L Commission* 80,000 Variable expenses 60,000 Fixed expenses 20,000 $ 160,000 Administrative Variable expenses 30,000 Fixed expenses 30,000 $ 60,000 $ 740,000 Budgeted profit $ 60,000 Budgeted production Capacity 400,000 units 600,000 units Sales commission is equal to 10% of sales $ The Managing Director, Mellissa McDonald, wants to improve the operating performance of the business. Ms McDonald had organised a planning day at a scenic winery resort. All relevant directors were asked to present their proposals about improving the operating performance of the business. Recently, Ms McDonald met you in a business forum and was impressed about your knowledge of accounting and its relevance to decision-making in businesses. You are invited to work as a consultant to the development of a plan to improve the operating performance of the company. She asked you to provide some answers to the questions raised by the respective directors while presenting their proposals. Question 1 The Managing Director would like to know the expected profit if selling prices were increased by 10%. She proposed an additional $70,000 for advertising campaign to maintain the present budgeted output at the higher selling prices Question 2 The Production Director thinks that the answer is an increased output. The Sales Director states that he could have the factory working at 100% capacity if he were allowed to reduce selling prices by 10%. The Production Director wishes to know the expected profit and break- even point under these conditions. The Marketing Director is opposed to proposal 2. She considers that more should be spent on sales promotion. She estimates that a sales promotion costing $40,000 would result in sales of 500,000 units per annum. She wishes to know the expected profit and break-even point under these conditions. Question 3 Question 4 The Sales Director also reports that a European distributor is quite willing to take 100,000 units, provided a reasonable selling price be agreed. This is a special order which may not be repeated in near future. The quality required, however, would increase the variable manufacturing cost by 15 cents per unit for the European offer only. This will require additional shipment costs of $40,000, of which the European company would pay half. No sales commission would, however, be payable. There will be no additional fixed manufacturing, selling and administrative costs. The variable administrative and selling expenses (other than sales commission) for this European offer would be the same as the current rates. What is the unit sales price at which the European order can reach break-even point? What are the relevant costs in relation to the European order? Why might Edinburg Company consider accepting this special European order at a price which may be less than its usual unit price of $2? What other factors should be taken into account to determine the finally agreed price