Reference no: EM132548746

Addis Press Ltd is considering launching a new monthly magazine at a selling price of Br. 15 per copy. Sales of the magazine are expected to be 500,000 copies per month, but it is possible that the actual sales could differ quite significantly from this estimate.

Two different methods of producing the magazine are being considered and neither would involve any additional capital expenditure. The estimated production costs for each of the two methods of manufacture, together with the additional marketing and distribution costs of selling the new magazine, are summarized below:

                                                  Method A                    Method B

Variable cost per unit                   Br. 0.55 per copy        Br. 0.50 per copy

Specific fixed costs                    80,000 per month         120,000 per month

Semi-variable costs:

The following estimates have been obtained:

350,000 copies; Br. 55,000 per month Br. 47,500 per month

450,000 copies: Br. 65,000 per month Br.52,500 per month

650,000 copies: Br. 85,000 per month Br. 62,500 per month

It may be assumed that the fixed cost content of the semi-variable costs will remain constant throughout the range of activity shown.

The Co. currently sells a magazine covering related topics to those that will be included in the new publication and consequently it is anticipated that sales of this existing magazine will be adversely affected. It is estimated that for every ten copies sold for the new publication, sales of the existing magazine will be dropped by one copy.

Sales and cost data of the existing magazine are shown below:

Sales 220,000 copies per month

Selling price Br. 0.85 per copy

Variable cost Br. 0.35 per copy

Specific fixed cost Br. 80,000

Required:

Question a) Compute, for each production method, the net increase in company profits which will result from the introduction of the new magazine, at each of the following levels of activity:

500,000 copies per month

400,000 copies per month

600,000 copies per month

Question b) Compute, for each production method, the amount by which sales volume of the new magazine could decline from the anticipated 500,000 copies per month, before the company makes no additional profit from the introduction of the new publication.

Question c) What inferences or conclusions (if any) can be drawn from your calculations above?