PART 2

John Smith explains that the Board is not happy with the profit projected in the draft budget, and that the sales director, Mary Ford, has produced three proposals to try and improve matters.

Proposal A involves launching an aggressive marketing campaign:

i. This would involve a single additional fixed cost of 14 million for advertising.

ii. There would be a revised commission payment of 18 per unit sold.

iii. Sales volume would be expected to increase by 10% above the level projected in the draft budget, with no charge in the unit selling price.

Proposal B involves a 5% reduction in the unit selling price:

i. This is estimated to bring the sales volume back to the level in the previous financial year.

Proposal C involves a 10% reduction in the unit selling price:

i. Fixed selling overhead would also be reduced by 45 million.

ii. If proposal C is accepted, the sales director believes sales volume will be 3.8 million units.

Questions:

1) For Proposal A, calculate:

1.1) the change in profit compared with the draft budget

1.2) the BEP point in units and sales revenues.

2) For Proposal B, calculate:

2.1) the change in profit compared with the draft budget

2.2) the BEP point in units and sales revenues.

3) For Proposal C, calculate:

3.1) the change in profit compared with the draft budget

3.2) the BEP point in units and sales revenues.

4) Based on your results for questions 3) to 5), recommend which proposal, if any, should be accepted on financial grounds, and explain your choice in detail.

5) Discuss three non-financial issues to be considered before a final decision is made.