Question No. 01

Fortunate Trading Company has introduced a new component of a machine which promotes its efficiency. The unit selling price is fixed at Rs. 700 and its variable unit cost is Rs. 400 while annual fixed cost is to the tune of Rs. 750,000. The present sales volume is 3,000 units. The company is evaluating to find an optimal selling price. The marketing manager has suggested that each reduction in selling price of Rs. 25 will enhance the sale units by 500.

Required:

a)Compute the present net operating income.

b)Calculate the present breakeven point in sales revenues and in units.

c)Assuming that the marketing studies are implemented, find the maximum profit that the company can earn annually at how many units and at what selling price per unit ?

d)What would be the breakeven point in units and in sales revenues using the selling price determined in (C) above.

e)Work out the margin of safety and margin of safety ratio at the present level of activity.

Work out the degree of operating leverage at the present level of activity.