marry poppins

Marry Poppins a friend of yours has recently set up a small business making curtains. She has supplied you the following figures and has asked your advice on a number of issues.

Costs per month

Materials R4100

Labour R5000

Production overheads R2000

Selling and Distribution overheads R1000

Administration overheads R500

the above are costs based on producing and selling 1200 pairs of curtains per month at a selling price of R15 each.

80% of labour costs are fixed as are 75% of production overheads, 60% of selling and distribution overheads and 100% of administration overheads. All other costs vary directly with output.

Mary wants to know

c) if sales are slower than expected by how much can she reduce her selling price in order to maintain the budgeted level of sales without making a loss?

d) Mary estimates her maximum capacity as 1500 curtains: would it be worthwhile to drop the price in order to increase sales to capacity ? if so, by how much?

e) If Mary baught another machine , she could increase her production capacity to 2500 curtains. Repayment of the machine would be R700 per month, and she would need extra member of staff, costing R1000 per month. She would also have to pay a bonus to all staffof R0.50 per pair of curtains, over and above their current wages and variable production overheads would increase by R0.30 per pair of curtains.

in order to increase sales she would have to reduce the price she estimates demand at different price levels to be as follows

Price Estimated demand monthly

R14 1500

R13 2000

R12 2500

what would the optimum price be?