Question 11

Boomsol Company Limited produces product A and B. the company budget for 2019 includes the following data;

Product A Product B

Unit selling price (GHS) 1 0.5

Contribution margin ratio (%) 40 60

The budget is design to show a figure of profit or loss for each product after apportioning fixed cost of GHS10,000 in proportion to the number of units of each product sold. For year 2019 product A is budgeted to show a profit of GHS1,400 and product B a loss of GHS200. The number of units of each product sold is expected to be in ratio 3:2.

Required

1. Calculate the current break-even point for the company as a whole
2. Advice the managing director on the basis of the information given whether to implement any of the following proposal;

1. To increase the price of product B by 25% in the expectation that the price elasticity of demand over this range of prices will be unitary.
2. To make changes to the production process that would reduce joint fixed cost by 2.5% and increase variable cost of each product by 10%.
3. To introduce both of the above changes.