The condensed income statement for Peri and Paul plc for 2020 is as follows.
A cost behavior analysis indicates that 75% of the cost of goods sold are variable, 42% of the selling expenses are variable, and 40% of the administrative expenses are variable.
Instructions
(Round to nearest unit, pence, and percentage, where necessary. Use the CVP income statement format in computing profi ts.)
a. Compute the break-even point in total sales and in units for 2020.
b. Peri has proposed a plan to get the company “out of the red” and improve its profitability. She feels that the quality of the product could be substantially improved by spending £0.25 more per unit on better raw materials. The selling price per unit could be increased to only £5.25 because of competitive pressures. Peri estimates that sales volume will increase by 25%. What effect would Peri’s plan have on the profits and the break-even point in sales of the company? (Round the contribution margin ratio to two decimal places.)
c. Paul was a marketing major in college. He believes that sales volume can be increased only by intensive advertising and promotional campaigns. He therefore proposed the following plan as an alternative to Peri’s: (1) increase variable selling expenses to £0.59 per unit, (2) lower the selling price per unit by £0.25, and (3) increase fixed selling expenses by £40,000. Paul quoted an old marketing research report that said that sales volume would increase by 60% if these changes were made. What effect would Paul’s plan have on the profi ts and the break-even point in sales of the company? d. Which plan should be accepted? Explain your answer.
