QUESTION TWO

Your Company is Concerned about its production process. The current situation is as follows:

1. Opening stock units are 1600. (valued at sh. 56,000 on marginal costing and sh. 78,000 on absorption costing).
2. Production is 15000 units
3. Sales of 13600 units @ sh. 125 per unit
4. Variable production costs at sh. 22 per units produced
5. Fixed Production costs sh. 800,000
6. Administration, selling & distribution variable costs are at sh. 15 of the sold units.
7. Fixed administration, selling and distribution costs sh. 460,000

Additional information:

The Company wants to improve its profitability by focusing on two strategies:

First Strategy

To cut the level of production by 20% and increase the selling price by 15%.

Second strategy:

To increase the level of production by 30% and lower the selling price by 5%

Note: all other information will remain the same.

Required:

a)Assess the net income/loss the company will receive under marginal costing and absorption costing on all the scenarios(20 marks)

b)Find out the Break Even point on both cases(10 marks)

c)Comment on the company's margin of safety(10 marks)