QUESTION 1 310 F12 1/7312 3 Akof Ltd manufactures high quality banana biscuits that are sold to hotels and restaurants in Accra. Two months ago, it had prepared a budget for the forthcoming financial year. Details of the budget is presented below: Sales Less: Direct material Direct labour Variable overheads Fixed overheads Total costs GH 2,080,000 1,160,000 840,000 972.600 GH 6,000,000 5.052.600 947,400 The budget above has been prepared on the assumption that sales will be 800,000 packets of biscuits. However, due to changing economic conditions, the sales forecast for the year is now 720,000 packets of biscuits. It is expected that selling price per unit, direct costs per unit and variable overhead cost per unit will not change from those budgeted. It is also expected that fixed overheads will be the same as those budgeted. Management is now considering a number of options so as to improve profitability for the forthcoming financial year. Option 1: Decrease the selling price by 20%. It is anticipated that this would increase sales volume by 25% on the forecast sales for the current year. Option 2: Decrease all variable costs by 10% and decrease fixed costs by 10%. This is not expected to have any impact on the sales level. Option 3: Decrease the selling price by 10% and decrease fixed costs by 5%. This is expected to increase sales volume by 25% on the forecast sales for the current year. Required: (a) Calculate the expected profit for the current year (forecast sales) (b) Based on the forecast activity for the year, calculate: (i) The breakeven point in packets of biscuits. (ii) The margin of safety in percentage terms. (iii) The sales revenue required to earn a profit of GH1,440,000. 3 Marks 2 Marks 2 Marks 2 Marks (c) Evaluate the profitability of the three Options and recommend the Option that ABC Ltd should adopt. 6 Marks (Total: 15 Marks)