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

The budget for the year includes the following:

Management, in considering this budget for the coming year, is dissatisfied with the results likely to arise. A

board meeting held recently discussed possible strategies to improve the situation and the following ideas

were proposed:

$(1)$ The production director suggested that the selling price of the product should be reduced by $10\%.$ This, he feels,

could increase the output and sales by $25\%.$ It is estimated that fixed production overhead would increase by

$50,000$ and fixed marketing overhead by $25,000.$

$(2)$ The finance director suggested that the selling price should be increased by $10\%.$ It is estimated that if the

current advertising expenditure of $100,000$ were to be increased by $400,000,$ sales could be increased to $90,000$

units. Fixed production overhead would increase by $25,000$ and marketing overhead by $20,000.$

$(3)$ The managing director seeks a profit of $600,000.$ He asks what selling price is required to achieve this if it is

estimated that: a$)$ an increase in advertising expenditure of $360,000$ would result in a $10\%$ increase in outputs, and

b$)$ fixed production overhead would increase by $25,000$ and marketing overhead by $17,000.$

$(4)$ The marketing director suggested that with an appropriate increase in advertising expenditure outputs could be

increased by $20\%$ and a profit on turnover of $15\%$ obtained. It is estimated that in this circumstance fixed production

overhead would increase by $40,000$ and marketing overhead by $25,000.$ What additional expenditure on

advertising would be made to achieve these results?

$(5)$ The chairman has received an approach from a department store to supply on a long$-$term contract $20,000$ units

per annum at a special discount. Existing sales would not be affected and fixed production overhead would be

increased by $50,000$ per annum. How much special discount could be given if by accepting the contract the profit of

the company were to be increased to $675,000$ per annum?

Questions

You are required to compile a forecast profit statement for the year for each of the proposals given and

comment briefly on each.