Question 2 Continued Tommy Ball Limited manufactures peripherals for games consoles. At the moment they sell 400,000 units a year. These 400,000 units are sold at 12 per unit. Variable costs stand at 4 per unit and fixed costs are approximately 2,000,000 The Board are considering their strategy for the next period and three proposals have been put forward. Option A Continue with the existing strategy, as outlined above. Option B - Reduce Sales Price The management team are considering whether it is worthwhile changing their sales strategy. If they were to drop the price of a unit to 10, this would make them more competitive. The board believes that this would enable them to win more business and may increase sales by 25%, whilst fixed costs would be unchanged. Option C - New Investment to Reduce Variable Costs Alternatively, it is possible that new investment could reduce the variable cost down to 3 per unit by introducing more efficient processes. However, this investment comes at a cost and it is anticipated that fixed costs will rise as a consequence to 2,250,000. The selling price would remain the same. Before a decision can be made, the management team needs some financial information and advice to help them determine which of the 3 options they should adopt for the forthcoming year Required For each of the 3 options, you are required to determine a) (0) The Profit (1) The breakeven point in units (i) The breakeven point in 's (iv) The margin of safety (V) The sales level that would be required if the company wished to make (15 marks) a profit of 1,500,000 b) On the basis of the figures calculated for each strategy in part (a) above, advise the management team on which option to proceed with Make clear any assumptions that you make and ensure that you justify the points that you make. (15 marks) Tan