The Managing Director of a small publishing company is concerned about a recent fall in demand for books. The books currently sell for an average price of 40. Recent cost and revenue figures are as follows:

	2019	2020
	000s	000s
Sales revenue	40,000	24,000
Costs Materials	10,000	6,000
Labour	14,000	9,200
Overheads	10,000	9,200
Net Profit	6,000	(400)

In order to stimulate trade for 2021, it has been decided that sales of the normal hard backed books will be replaced by soft backed books at a lower selling price of 30. Material costs are also expected to reduce by 2 per book. The Managing Director is estimating that demand for the lower cost books will be the same in 2021 as it had been in 2019.

Required

1. Calculate the anticipated profit for 2021 if the Managing Directors estimates are correct and if other costs remain the same. You will need to identify the fixed and variable elements of the different costs using the High-Low method. (8 marks)

2. Calculate the number of books to be sold in order for the company to:

1. Break even
2. Make a net profit of 6million similar to 2019. (4 marks)

3. Alternatively the company could carry on selling the hard back books at 40 each but would invest in a marketing campaign costing 2,000,000 in order to boost sales.

Calculate the number of books that have to be sold in order for the company to:

1. Break even
2. Make a net profit of 6million similar to 2019. (4 marks)

4. Evaluate the two alternatives. Discuss the reliability of the figures you have calculated if output could be increased.

Discuss the use of the High-Low method for a company to estimate its total fixed and variable costs. Explain the formula of a line (y=a+bx) in relation to a companys fixed and variable costs.