Reference no: EM132971056
Question - Jennings and Company manufacture Product X, which faces severe competition from other similar products within the market. Because of the level of competition, the company sells Product X at $ 100 per unit, a price 5% lower than its competition. Jennings Company is currently operating at 60% level of activity, and at this level, sales are $ 2 400 000. Variable costs are $ 60 per unit. At $ 180,000, when output is nil, the semi-variable costs may be considered as fixed, and the variable element is $ 500 for each additional 1% level of activity. At the present level of activity, fixed costs are $ 300 000 but these costs are expected to increase by $ 100 000 if a level of activity of 80% or above is reached. To cope with the competition, a proposal of reducing the selling price by 5% is being considered by the management of the company.
Required -
A. You are required to prepare a statement showing the total cost at each level of activity of 60%, 70% & 80%.
B. On the same statement show the operating profit at the level of activity of 60%, 70% & 80% assuming that:
i. the selling price remaining at $ 100.
ii. there is a reduction in the selling price by 5%.
C. Show the number of units required to be sold to maintain a profit of $450,000 if the company decides to reduce the selling price of the product by 5%.
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