Question
HabibMall reported a loss of $30,000 in 2019 and its managers are now considering what to do about this loss. They hope to make a
HabibMall reported a loss of $30,000 in 2019 and its managers are now considering what to do about this loss. They hope to make a profit in the next 6 months, and the following proposals have been made:
- Launch an advertising campaign.
- Reduce selling price of products
- Reduce variable costs by installing more efficient equipment, but will increase fixed costs.
TASK
Assuming the business intends to adopt each proposal individually, evaluate the impact that each proposal will have on the break-even point. (14 points)
- The following CVP information is for two different companies, Hob's Ltd. and Mill's Ltd. Study the information carefully.
|
| Hob's Ltd | Mill's Ltd |
| Selling price | $20 | $25 |
| Variable cost | $12 | $10 |
| Fixed cost | $8,000 | $36,000 |
| Break-even point | 1000 units | 2,400 units |
|
|
|
|
| Profit at 3000 unit sales | $16,000 | $9,000 |
| Profit at 6000 unit sales | $40,000 | $54,000 |
TASK
Why did Mill's profit increase at a faster rate than Hob's when the sales increased from 3000 units to 6000 units? Explain your answer clearly. (18 points)
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