Kuntu Ltd manufactures one standard product, the standard marginal cost of which is as follows:

Direct material per unit Direct wages per unit Variable production overhead

The budget for the year includes the following: Output (units)

Total fixed Overheads: Production Advertising

Marketing

Contribution

GH

10.00 7.50 1.25 18.75

80,000

GH

1,000,000 600,000 500,000

2,500,000

In reviewing the budget for the coming year, management is dissatisfied with the results likely to arise. Emergency board meeting was held to discuss possible strategies to improve the situation and the following strategies were proposed:

Strategy 1

The Production Manager suggested that the selling price of the product should be reduced by 10%. This could increase the output by 25%. It is estimated that these changes would result in increase of fixed production overhead and fixed marketing overhead by GH50,000 and GH25,000 respectively.

Strategy 2

The Director of Finance suggested that the selling price should be increased by 10%. Additionally, with increase in advertising cost by GH400,000, sales units would increase to 90,000 units. It is also estimated that this strategy would increase the fixed production overhead by GH25,000 and marketing overhead by GH20,000.

Strategy 3

The Marketing Director suggested that with an appropriate increase in advertising expenditure, sales could be increased by 20% and a profit on turnover of 15% obtained. It is estimated that

1

fixed production overhead would increase to GH1,040,000 and marketing overhead would increase by GH25,000.

Strategy 4

The Managing Director seeks a profit of GH600,000. He would like to know at what selling price the target profit could be achieved given the following estimates:

An increase in advertising expenditure by GH360,000 would result in a 10% increase in sales. However, fixed production and marketing overheads would increase by GH25,000 and GH17,000 respectively

Required:

i) Prepare a forecast profit statement for Strategy 1 and 2.

ii) Estimate the additional expenditure on advertisement to achieve results in Strategy 3.

iii) Estimate the selling price that is required to achieve a profit of GH600,000 in Strategy 4.