Noble Enterprises Ltd produces and sells one product. The forecasts for the next period were as follows: Maximum capacity 200,000 units; Forecast output 75% of capacity; Selling price Rs20; Variable costs Rs10; Total fixed costs Rs.750, 000.

Two proposals have been put forward to the company for using the spare capacity:

If the selling price is reduced by 10%, it would lead to a 20% increase in demand for the product.

An overseas developing company is interested in purchasing the remaining 25% of capacity if the selling price per unit could be brought down to Rs.14 per unit.

(a) For each of the proposals put forward to the company, calculate the expected total profit, assuming that there are no changes in the cost structure.

(b) Advise the management which of the proposals, if any, should be accepted