Question 3

Corinth Ltd manufactures a single product. The factorys theoretical maximum production capacity is 36,000 units. A budget for the year to 31 March 2019 has been prepared based on production and sale of 24,000 units at a selling price of 400 per unit and a variable cost per unit of 324. The resulting budget is as follows.

Two proposals which may increase the companys profit are currently under review.

Under the first, 100,040 would be spent on a one-off advertising campaign and an additional commission of 2 per unit sold would be paid to sales staff. It is believed that these measures would increase the number of units sold at the existing selling price to 26,400.

Under the second proposal, the selling price per unit would be reduced to 380. Market research indicates that 32,000 units would be sold at this price. Improved discounts could then be secured on purchase of materials, reducing the variable cost per unit by 4 relative to that used in the original budget.

You should consider each of the two proposals independently.

Required:

1. Calculate the breakeven point (in units) and the margin of safety for each of the two proposals. Express the result of your calculation of the margin of safety as a percentage.
2. Critically evaluate the two proposals. Your critical evaluation should be supported by the results of your calculations in each of part (a) and part (b). You should also consider any other factors that you consider to be relevant to each of the two proposals.

\begin{tabular}{|l|c|} \hline & \\ \hline Sales revenue & 9,600,000 \\ \hline Total variable cost & 7,776,000 \\ \hline Contribution & 1,824,000 \\ \hline Fixed costs & 1,710,000 \\ \hline Profit & 114,000 \\ \hline \end{tabular}