Reference no: EM132542695

Question - IU Ltd, a retailer of men's shirts, is investigating the likely sales prospects for next year. The original projection expected that 75,000 shirts would be sold at Rs.10.60 each. The variable costs would be Rs.4.20 per unit and the relevant fixed costs were expected to be Rs.220, 000.

Three possible alternative strategies have been suggested:

Option 1 The managing director thinks that more could be sold if the price were reduced by 5%.

Option 2 The production manager thinks that the price could be increased by 10% with only a small loss in sales.

Option 3 The sales manager proposes that the variable cost should be increased by 20p per unit as commission to the sales force, with a consequent saving in fixed costs of Rs.15, 000.

REQUIRED -

a) Calculate the break-even point if the original proposal is adopted.

b) Calculate the anticipated profit if the original proposal is adopted.

c) Calculate the levels of sales required under the proposals 1 and 2 to achieve the profit computed in (a).

d) Calculate the break-even point if the sales manager's proposal is accepted, and compare this with the break-even point under the original proposal.