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Question IM 8.8 Video Technology Plc was established in 1987 to assemble video cassette recorders Intermediate: (VCRs). There is now increased competition in its markets

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Question IM 8.8 Video Technology Plc was established in 1987 to assemble video cassette recorders Intermediate: (VCRs). There is now increased competition in its markets and the company Non-graphical expects to find it difficult to make an acceptable profit next year. You have been CVP analysis and appointed as an accounting technician at the company, and have been given a the acceptance of copy of the draft budget for the next financial year. a special order Draft budget for 12 months to 30 November 2001 (fm) (fm) Sales income 960.0 Cost of sales: Variable assembly materials 374.4 Variable labour 192.0 Factory overheads - variable 172.8 - fixed 43.0 (782.2) 177.8 Gross profit Selling overheads - commission 38.4 - fixed 108.0 Administration overheads - fixed 20.0 (166.4) Net profit 11.4 The following information is also supplied to you by the company's financial con- troller, Edward Davies: 1 planned sales for the draft budget in the year to 30 November 2001 are expected to be 25% less than the total of 3.2 million VCR units sold in the year to 30 November 2000; 2 the company operates a Just-In-Time stock control system, which means it holds no stocks of any kind; 3 if more than 3 million VCR units are made and sold, the unit cost of material falls by f4 per unit; sales commission is based on the number of units sold and not on turnover; the draft budget assumes that the factory will only be working at two-thirds of maximum capacity; 6 sales above maximum capacity are not possible. Edward Davies explains that the Board is not happy with the profit projected in the draft budget, and that the sales director, Anne Williams, has produced three proposals to try and improve matters. 1 Proposal A involves launching an aggressive marketing campaign: (i) this would involve a single additional fixed cost of (14 million for advertising; (ii) there would be a revised commission payment of (18 per unit sold; (iii) sales volume would be expected to increase by 10% above the level pro- jected in the draft budget, with no change in the unit selling price. 2 Proposal B involves a 5% reduction in the unit selling price: (i) this is estimated to bring the sales volume back to the level in the year to 30 November 2000. 3 Proposal C involves a 10% reduction in the unit selling price: (i) fixed selling overheads would also be reduced by $45 million; (ii) if proposal C is accepted, the sales director believes sales volume will be 3.8 million units. Task 1 (a) For each of the three proposals, calculate the: (1) change in profits compared with the draft budget; (ii) break-even point in units and turnover. (b) Recommend which proposal, if any, should be accepted on financial grounds

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