QUESTION 2

The following budgeted information for the year ended 31 December 2020 is provided by Voltex Ltd, a manufacturer of a single product:

	TOTAL R
Sales (30 000 units)	360 000
Direct material	54 000
Direct labour	42 000
Variable manufacturing overheads	33 000
Sales commission	33 000
Total fixed costs	R78 000

The sales forecast for the year ended 31 December 2020 is 15% less than the actual sales for the year ended 31 December 2019. The sales director produced three proposals to improve the position

Proposal A involves launching an aggressive marketing campaign. This would involve a single additional fixed cost of R18 000 for advertising. Sales commission will increase by R1.20 per unit. Sales volume is expected to increase by 10% above the 2020 budgeted sales with no change in the unit selling price.

Proposal B involves a 10% reduction in the unit selling price. Fixed selling overheads will also reduce by R12 000. The budgeted sales volume is expected to increase by 10%

Proposal C involves a 10% reduction in the unit selling price and this is estimated to bring the sales volume back to the budgeted level as the year ended 31 December 2019. The sales force will be incentivised with a salary increase totalling R15 000 for the year.

REQUIRED

2.1 Due to the uncertainties related to forecasted sales which have been compounded with the effects of COVID19, the financial manager would like to know which of the three proposals have the least risk in terms of achieving a sales volume that would not result in a loss. (4 marks)

2.2. The financial director has asked you to indicate which of the three proposals should be chosen to achieve the highest operating profits. (14 marks)

2.3 Based on your findings for both 2.1 and 2.2 which proposal would you advise this company to adopt. (2 marks)