White Ltd manufactures and sells three products with the following selling prices and variable costs:...
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Accounting
White Ltd manufactures and sells three products with the following selling prices and variable costs: Product A Product B Product C (Rs/unit) (Rs/unit) (Rs/unit) Selling price 3 2.45 4 Variable cost 1.2 1.67 2.6
The company is considering expenditure on advertising and promotion of Product A. It is hoped that such expenditure, together with a reduction in the selling price of the product, would increase sales. Existing annual sales volume of the three products is: Product A 460,000 units Product B 1,000,000 units Product C 380,000 units
If Rs60,000 per annum was to be invested in advertising and sales promotion, thus increasing the fixed cost, sales of Product A at reduced selling prices would be expected to be: 590 000 units at Rs2.75 per unit Or 650 000 units at Rs2.55 per unit
Annual fixed costs are currently Rs1,710,000 per annum.
REQUIRED
(a) Calculate the current break-even sales revenue of the business.
[10 marks]
(b) Advise the management of White Ltd as to whether the expenditure on advertising and promotion, together with selling price reduction, should be introduced on Product A.
[10 marks]
(c) Explain the following term:
(i) Contribution margin
[3 marks]
(ii) Margin of Safety
[2 marks]
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