Reference no: EM132771689

Question - Baobab fabricators Ltd. have been facing a lean financial spell for the past two years. Profits have been declining steadily and results of the preceding year showed total losses amounting to Sh.2, 000,000, the first time the company had not reported profits in its 10-year history.

The Chairman and the board of directors have been agonizing on the remedial steps to implement to arrest the situation. Four competing proposals have been suggested by a task force, set up some months back, aimed at boosting sales and improving efficiency of operations in the current year. You, as a member of the task force, have been invited to attend the next board meeting which will deliberate on the proposals. You know the following facts:

1. The target profit for the current year is Sh. 4, 000,000 regardless of the proposal that will be adopted.

2. The company's fixed costs currently amount to Sh. 20,000,000 per year.

3. The company can sell up to a maximum of 12,000 units of its product in the local market and unlimited quantities in a neighboring country. For the sales in the local market, unit variable costs amount to Sh.5, 000, while for the sales in the neighboring country, an extra Sh.500 per unit is incurred in transportation expenses.

4. The same selling price normally prevails both in the local market and neighbouring country.

5. Sales for the past year amounted to 9,000 units, all in the local market.

The main requirements of the four competing proposals are as follows:

Proposal A: The Company should improve the quality of packaging of its products at a cost of Sh.500 a unit.

Proposal B: The Company should spend Sh. 2,000,000 on an advertising campaign.

Proposal C: The Company should cut the selling price by Sh.500 per unit.

Proposal D: The Company should buy efficient machinery. This would cut the variable cost per unit by Sh.1, 000 at all levels of sales.

Required -

a) For proposals A, B and C, determine the number of units to be sold in the neighbouring country in order to achieve the target profit.

b) If proposal D is adopted and sales remain constant at 9,000 units, determine the maximum increase in fixed machine cost if the target profit is to be achieved.

c) Briefly explain four benefits of using break-even analysis.