QUESTION TWO

Smith-Kline Company ltd manufactures a product called Covid-20 for use as immunity booster in children. The companys plant in Nairobi has an annual capacity of 75,000 units. Smith-Kline currently sells 60,000 units at a selling price of ksh148. It has the following cost structure:

-Variable manufacturing costs per unit ksh 63

-Fixed manufacturing costs ksh 1,012,000

-Variable marketing and distribution costs per unit ksh15

-Fixed marketing and distribution costs ksh 780,000

Required:

(Consider each question separately.)

A.-Calculate the breakeven volume in units and in shillings. (6 Marks)

B. -Calculate the % margin of safety (4 Marks)

C. -The marketing department indicates that decreasing the selling price to ksh140 would stimulate sales to 70,000 units. This strategy will require Smith-Kline to increase its fixed costs, although variable costs per unit will remain the same as before. What is the maximum increase in fixed costs for which Smith-Kline will find it worthwhile to reduce the selling price? (7 Marks)

D. -The manufacturing department proposes changes in the manufacturing process to add new features to the Covid-20 product. These changes will increase fixed manufacturing costs by ksh150,000 and variable manufacturing costs per unit by ksh3.20. At its current sales quantity of 60,000 units, what is the minimum selling price above which Smith-Kline will find it worthwhile to add these new features? (7marks)