Summary of Wepiah Ltd a manufacturing company’s budgeted profit statement for its next financial year, when it expects to be operating at 75 percent of capacity, is given below.
GHf Sales 9,000 units at Glift 32 Less: GI-10 288,000 Direct materials 54,000 Direct wages 72,000 Production overhead — fixed 42,000 — variable 18,000 186.000 Gross profit 102,000 Less: administration selling and distribution costs: — fixed 36,000 — varying with sales volume 27,000 63.000 Net profit 39,000 It has been estimated that:
(i) If the selling price per unit were reduced to G1.10 28, the increased demand would utilize 90 percent of the company’s capacity without any additional advertising expenditure; (ii) To attract sufficient demand to utilise full capacity would require a 15 percent reduction in the current selling price and a GFI0 5,000 special advertising campaign. You are required to: a) Calculate the breakeven point in units, based on the original budget; ( 2 marks) b) Calculate the profits and breakeven points which would result from each of the two alternatives and compare them with the original budget. (13 marks) c) Summaries your recommendation in the for a memo to the managing director of Gerard Limited. ( 5 marks ) (Total 20 marks)