Thomass Magnate produces backpacks in its fully automated facility. Its lightweight nylon backpack used to be a sought-after product among university studente. The company barely broke even last year after combating declining sales. Last year, the company produced and sold so.000 backpacks at an average price of RM90 per unit. Variable manufacturing costs were RM unit, and variable marketing costs were RM5 per unit sold. For the current year, as optimistic as they could be, the company developed its buainess plan with the assumption it would gain an annual profit of RM 550.000 with the established price and costs. "Only 10,000 backpacks sold in the first quarter? We need to think of a new strategor a wry good onel" said the president after reviewing the first quarter financial statements. It was clear that the current year's target profit would not be reached unless some actions were taken. A management committee has been assigned to analyse the situation and develop several options. The following mutually exclusive options were presented to the president: - Option 1: Reduce the sales price to RM75. The sales department forecasts that with the significantly reduced sales price, 55,000 backpacks can be sold during the remainder of the year. Total fixed and variable unit costs will stay as budgeted. - Option 2: Lower variable costs per unit by RM8 through the use of less expensive raw materials and slightly modified manufacturing techniques. The sales price would also be reduced by RM10, and sales of 51,000 backpacks for the remainder of the year are forecast. - Option 3: Cut fixed costs by RM280,000 and lower the sales price by 5 per cent. Variable costs per unit will be unchanged. Sales of 49,000 backpacks are expected for the remainder of the year. 4. "Instead of focusing on our out-of-fashion backpack, why don't we introduce a new (12 marks) backpack to step up the game?" says the vice president. The new line of backpack uses coated canvas material which is more lightweight, durable and fashion line of backpack uses coated backpack will be sold for RM110 per unit. The variable costs than nylon. The canvas manufacturing cost and a marketing cost of RM8 per backpack. costs consist of the RM42 are produced and sold, total fixed costs will increase by RMack. If both models of backpack 4. "Instead of focusing on our out-of-fashion backpack, why don't we introduce a new (12 marks) backpack to step up the game?" says the vice president. The new line of backpack uses coated canvas material which is more lightweight, durable and fashion line of backpack uses coated backpack will be sold for RM110 per unit. The variable costs than nylon. The canvas manufacturing cost and a marketing cost of RM8 per backpack. costs consist of the RM42 are produced and sold, total fixed costs will increase by RMack. If both models of backpack 2. Briefly discuss the company's cost structure. How is this concept related to (4 marks) Thomass Magnate to meet its target annual profit with the established price and costs? 3. Determine which option should be selected to achieve the company's annual target profit. (4 marks) Explain your answer. (Note: Show all your workings)
