Apex Ltd (AL) produces a product that sells
for Mu 35,000 each. The variable costs are Mu 20,000 per unit
and the fixed cost are Mu 600,000. AL can produce a maximum
of 80 units per year. Currently AL is operating at 60 % capacity.
It is contemplating the effects of reducing the selling price
by Mu 2,000 per unit, adding a new feature that will increase
the unit variable costs by Mu 1,000 and allocating an additional
Mu 120,000 per year for aggressive promotion and advertising.
These actions are expected to increase plant utilization to
90 %. Evaluate the alternatives .
Under the existing conditions
Break-even volume (B) = Fixed Cost (F)/(Unit Price(P)-Unit Variable
Cost(V))
= 600,000 /(35,000- 20,000) = 40 units
AL is now selling 0.60 x 80 = 48 units, the gross annual profit
(Z) is
Z= units sold in excess of B x unit contribution = (48-40) units
x 15,000 = Mu 120,000
Under the Proposed conditions
New Break Even Volume (Bnew) = Fnew/(Pnew-Vnew)
Here Fnew = 600,000 + 120,000 = 720,000
Pnew = 35,000-2,000 = 33,000
Vnew= 20,000+1,000 = 21,000
Bnew = 720,000/(33,000-21,000)= 60 units
The gross profit at 90 % capacity (i.e new utilization = 0.90
x 80 = 72 units) will be Znew= [ 0.90 x 80 units - 60 units]
x [ 33,000-21,000]
= (72-60) x [33,000-21,000]
=12 units x 12,000 = Mu 144,000
Thus, it may be advisable to go in for proposed action. |
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