QUESTION 5 [25 MARKS] White Ltd manufactures and sells three products with the following selling prices and variable costs: Selling price Product A Product Product B C (Rs/unit) (Rs/unit) (Rs/unit) 3 2.45 4 1.21 | 1.67 2.6 Variable cost The company is considering expenditure on advertising and promotion of Product A. It is hoped that such expenditure, together with a reduction in the selling price of the product, would increase sales. Existing annual sales volume of the three products is: Product A Product B Product C 460,000 units 1,000,000 units 380,000 units If Rs60,000 per annum was to be invested in advertising and sales promotion, thus increasing the fixed cost, sales of Product A at reduced selling prices would be expected to be: 590 000 units at Rs2.75 per unit Or 650 000 units at Rs2.55 per unit Annual fixed costs are currently Rs1,710,000 per annum. REQUIRED (a) Calculate the current break-even sales revenue of the business. [10 marks] (b) Advise the management of White Ltd as to whether the expenditure on advertising and promotion, together with selling price reduction, should be introduced on Product A. (c) Explain the following term: (i) Contribution margin (ii) Margin of Safety [10 marks] [3 marks] [2 marks] Page 8 of 8