GabNat Ltd is a well-established business that assembles laptops.

The company is facing increasing competition and the owner is concerned about its declining profits.

You have been provided with the draft budget for the next year.

DRAFT BUDGET FOR THE YEAR ENDING 31 DECEMBER 2020:

million million

Sales revenue 960.0

Cost of sales:

Variable assembly materials 374.4

Variable labour 192.0

Variable manufacturing overheads 172.8

Fixed manufacturing overheads 43.0 (782.2)

Gross profit 177.8

Sales commission (variable) 38.4

Fixed selling overheads 108.0

Fixed administrative overheads 20.0 (166.4)

Operating profit 11.4 You have also been provided with the following information:

Planned sales for the year to 31 December 2020 are expected to be 25% less than the 3.2 million laptops sold in the previous financial year.

The company holds no stock of any kind.

If more than 3 million laptops are sold, the unit cost of material will fall by 4 per unit.

Sales commission is based on the number of units sold. The company is considering two proposals for improving its profit.

Proposal A involves heavy investments in a new marketing campaign:

This would involve additional fixed costs of 14 million for advertising.

There would be a revised commission payment of 18 per unit sold.

Sales volume would be expected to increase by 10% above the level projected in the draft budget, with no change in the unit selling price.

Proposal B involves a 5% reduction in the unit selling price:

This is estimated to bring the sales volume back to the level in the previous financial year.

Required: a) For the original plan and for each of the two proposals, identify the selling price per unit, the unit variable costs and the unit contribution margin. Prepare a contribution margin statement that shows the operating profit for each of the three options. You are also required to calculate the break-even point in units and revenues for each of the three options. Show all of your workings. b) Recommend which option should be chosen. In your answer, you should comment both on the operating profit and break-even implications of the three options. Word limit: 400 words c) Identify any non-financial issues to be considered before a final decision is made. Word limit: 400 words