Based on sales value $($Rs$),$ not physical units.

Commissions are based on sales revenue; all other variable expenses vary in terms of units sold.

The factory has a capacity of $150,000$ units per year. The results for $1984$ have been disappointing.

Top management is exptoring a number of possible ways to make operations pro$$table in $1985.$

Required: $($Consider each situation independently$)$

$1.$ Recast the income statement into a contribution format. There will be three major sections:

sales, variable expenses and $$xed expenses. $($Also note that "contribution" is the difference

between "sales" and variable costs", which "contributes" towards recovery of $$xed costs. As

such, surplus contribution over $$xed costs is pro$$t and de$$ciency is loss$).$ Show costs per unit

in an adjacent column. Allow adjacent space for entering your answers to question two.

$2.$ The sales manager of IRGL.is torn between two courses of action:

a$)$ He has studied the market potential and believes that a $15\%$ cut in price would $$ll the

plant to capacity.b$)$ He wants to increase prices by $25\%,$ to increase advertising by Rs $150,000,$ and to

boost commissions to $10$ per cent of sales. Under these circumstances, he thinks that

unit volume will increase by $50$ per cent.

Prepare the budgeted income statement, using a contribution margin format. What would be

the new pro$$t or loss under each alternative? Assume that there are no changes in $$xed costs

other than advertising.

The president of IRGL does not want to tinker with the price. How much may advertising be

increased to bring production and sales up to $130,000$ units and will earn a target pro$$t of $5$

per cent of sales?

A Government department is willing to buy $60,000$ units of product $"$if the price is right."

Assume that the present market of $90,000$ units at Rs $4$ each will not be disturbed. IRGL will

not have to pay any sales commission on this order. The Government Department will pick

up the units directly from IRGL$$s premises $($ex$-$works$).$

However, IRGL must refund Rs $24,000$ of the total sales price of this order to subsidize a

safety promotion campaign to be launched by the Government Department. In addition, special

packaging, $($showing the Govemment$$s name instead of IRGL$$s$)$ will increase manufacturing

costs of these $60,000$ units by $10$ paise per unit. At what unit price must the Govemment

Department be quoted for IRGL to breakeven on total operations in $1985.$

The president$$s daughter$-$in$-$law, who is a recent graduate from a prestigious design institute,

thinks that a fancy new package will aid in getting more sales. Present packaging costs per

unit are all variable and consist of $5$ paise direct materials and $4$ paise direct labour", new

packaging costs will be $30$ paise and $13$ paise respectively. Assuming no other changes in cost

behaviour, how many units must be sold to earn a net pro$$t of Rs $20,000?$