Question 1

Flower Sdn Bhd makes replica branded shirts which it sells to clothes retailer for $50 per shirt. Retailers typically sell the shirts to consumers for $80 per shirt. Budgeted production for the forthcoming period is 400,000 shirts. Budgeted overheads are $4.8 million. Variable cost per shirt is expected to be $13. Retailers have started to use their buyer power over Flower Sdn Bhd and have begun to demand a discount off the existing price charged to them. The directors of Flower Sdn Bhd are concerned that the company may lose business if they do not offer some sort of discount to their customers and have asked for advice from the market research consultancy, Lucy&Partners. Lucy&Partners have suggested that Flower Sdn Bhd needs to decrease the selling price charged to retailers by at least 10% if they are to retain their existing customer. However, they believe that Flower Sdn Bhd can use some buyer power of their own over supplier of materials such that the variable cost per shirt would fall by 5%. Required: (a) calculate the breakeven point in terms of units and sales revenue and the margin of safety based upon the existing selling price and variable cost per shirt. Explain your answer. (b) calculate the breakeven point in terms of units and sales revenue and the margin of safety, assuming the company not only decreases the selling price by 10% but also uses its own buyer power over its suppliers. Explain your answer. (c) how many units has the breakeven point changed between (a) and (b)? Explain the effect upon profit of the proposed price changes and suggest whether they should be implemented. (d) discuss two (2) factors that should be considered before implementing the proposed changes to product price.