Question

M Ltd’s budgeted profit for its next financial year, when it expects to be operating at 75% of its capacity, is as follows: K’000 K’000 Sales 9, 000 units at K32 per unit 288 Less: Direct material 54 Direct wages 72 Production overhead Fixed 42 Variable 18 186 Gross profit 102 Less: Non-production cost Fixed 36 Varying with sales volume 27 63 39 It is estimated that: (i) If the selling price per unit were reduced to K28, the increased demand would utilise 90% of the company’s capacity without any additional advertising expenditure; (ii) To attract sufficient demand to utilize full capacity would require a 15% reduction in the current selling price and a K5,000 special advertising campaign. Required (a) Calculate the breakeven point in units based on the original budget (b) Calculate the profits and breakeven points that would result from each of the 2 alternatives and compare them with the original budget (c) Make a recommendation based on the information in (a) and (b)

Answer 1