Question

1. GreatMall reported a loss of $30,000 in 2019 and its managers are now considering what to do about this loss. They hope to make a profit in the next 6 months, and the following proposals have been made:

• Launch an advertising campaign.
• Reduce selling price of products
• Reduce variable costs by installing more efficient equipment, but will increase fixed costs.

TASK

Assuming the business intends to adopt each proposal individually, evaluate the impact that each proposal will have on the break-even point. (12 points)

2. The following CVP information is for two different companies, Saturn Ltd. and Venus Ltd. Study the information carefully.

	Saturn Ltd	Venus Ltd
Selling price	$20	$25
Variable cost	$12	$10
Fixed cost	$8,000	$36,000
Break-even point	1000 units	2,400 units
Profit at 3000 unit sales	$16,000	$9,000
Profit at 6000 unit sales	$40,000	$54,000

TASK

Why did Venus’s profit increase at a faster rate than Saturn’s when the sales increased from 3000 units to 6000 units? Explain your answer clearly. (12 points)

Answer 1

For the Question relating to Great mall, the information is incomplete. It requires the information regarding the current break even point, current fixed cost and the cost incurred in each alternative.

For the second question - the solution is:

Per unit contribution for Saturn is = $20 - $12 = $8

Per unit contribution for Venus is = $25 - $10 = $15

Thus, per unit of Venus contribute more towards the operating income when compared with contribution per unit of Saturn.

Let the indifference point between the two product be X

Thus, 8X - 8000 = 15X - 36000

=> X = 4000 units

Thus at 4000 units, the net operating income for both the entities would be same and after 4000 units for each additional unit, Saturn Ltd would contribute $8 and Venus Ltd would contribute $15.

This is why, at 3000 units, net operating income for Saturn Ltd is higher whereas at 6000 units operting income of Venus is higher.

Thus after the indifference unit of 4000, the profit of Venus increases at a faster rate then Saturn.s Profit.

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