Reference no: EM132558727

Question - The following information applies to a company operating in Chilanga. It is the operational results for the year just ended, 2019.

The company, which manufactures a single product coded 'zeron' , achieved a sales value of K8.000.000 for the period under consideration. A unit of 'zeron' was being sold at K20. During the period under review, the company operated at 80% capacity. Suggestions are being made to increase the operating capacity. Details of the cost structure are hereby given:

Direct material K4

Direct labour K4

Variable production overhead K80,000

Variable selling overhead K160,000

Variable distribution overhead K120,000

Fixed production overhead K320,000

Fixed selling overhead K180,000

Fixed distribution overhead K80,000

Fixed administration overhead K1,440,000

Further, sales agents are paid a commission of 5% on sales value for selling 'zeron'.

Required -

(a) Compute the company's breakeven point in sales value.

(b) Prepare income statements, given three scenarios depicted hereunder:

Scenario 1 At the present level of sales

Scenario 2 If the unit selling price is reduced by 5% which should increase sales volume by 12.5%

Scenario 3 If the unit selling price is reduced by 10% which should increase sales volume by 25%

Comment on scenario three above which will stretch the capacity limit.