Gunz Furniture produces and sells variety of leather upholstered furniture. The company has

recently introduced a single infant leather couch. The single infant couch is priced at $N$$$250$

and the variable cost to produce one single infant couch is $N$$$1000.$ Fixed cost amount to

N$$2475000.$ In $2023,$ the company sold $3000$ single infant couches. Due to the success of

the single infant couch, the company plans to introduce a double infant couch to carter for

those with twin babies. Gunz furniture aims to price the double couch at $N$$$1250$ due to the

potential economies of scale that the company will benefit from after this expansion. The

variable costs for the double couch are estimated to be $N$$$750$ per couch. It is anticipated that

the target customers who currently buy the single couch will not be enticed by the price of the

double couch to change their buying behaviour. The company has enough capacity to

manufacture all the units of the single infant couch and the double infant couch without

incurring additional fixed costs. It is estimated that in $2024$ the company will sell $3000$ units

of the single couch and $2000$ units of the double couch.

In a recent management meeting, there was no agreement on whether the company should

introduce the double couch. The management accountant proposes to reject the proposal of

Page $14$ of $18$

FACULTY OF COMMERCE, MANAGEMENT AND LAW

OLD CURRICULUM MODULES

the double couch if the proposed sales mix is maintained. She says the proposal will increase

the revenues needed to break even.

You have recently been employed as a management accounting intern at Gunz Furniture and

you are required to assist the management accountant.