Elite Consultancy offers exceptional strategic and tactical financial and non-financial types of business advisory services to a wide range of its clients, helping them achieve their business goals and objectives. As a trainee at the company, your manager has requested that you prepare a business report to help the management of the following two companies address their current issues as highlighted in the case.
Bella Ltd
Bella Ltd, one of Elite Consultancy’s clients, manufactures and sells 25,000 units of its product FM12 at full capacity each year. The cost and selling price structure for this level of activity is as follows:

	at 25,000 units output ($ per units)
Manufacturing costs:
Direct materials	$14
Direct labour	13
Variable manufacturing overhead	4
Fixed manufacturing overhead	8
Total manufacturing costs	39
Selling costs:
Sales commission – 10% of sales revenue	6
Fixed	3
Administrative costs:
Fixed	2
Total costs	50
Markup (20%)	10
Selling price	60

Given the significant impact of COVID-19 on FM12 sales, the marketing department of Bella Ltd has estimated the potential sales volumes which could be achieved at three alternative sales prices:

Selling price per unit	$70	$80	$90
Annual production and sales volume	20,000 units	16,000 units	11,000 units

The following information is provided on the effect of changes in sales volume on cost behaviour:
- Direct material: When production volume drops below 15,000 units per year, the direct material cost per unit will increase by 15% due to the loss of bulk discounts.

- Direct labour: If production volume falls below 20,000 units per year, labour costs will decrease by 10% due to reduced bonus payments. Sales commission will stay the same at a rate of 10% of the sales revenue.

- Fixed manufacturing overhead: If annual production volume gets below 20,000 units, then a machine rental cost of $10,000 per annum could be saved. This will be the only change in the total expenditure on fixed manufacturing overhead.

- Fixed selling costs: If annual production volume falls below 24,000 units, a reduction in the part-time sales force would save $5,000 per year. This will be the only change in the fixed selling costs.

- Variable manufacturing overhead: There would be no change in the unit cost for variable manufacturing overhead.

- Administration costs: If production volume remains within 25,000 units, the total expenditure on administration will remain unchanged.

- Inventory: Product FM12 is highly perishable, therefore no inventories are held.

REQUIRED:
When preparing the business report for Bella Ltd, it is crucial to address the following issues with supporting calculations.

i. Determine the annual profit based on the selling price of $60 per unit.

ii. Prepare a schedule to show the annual profit which would be earned with each of the three alternative selling prices.

iii. Recommend the selling price which should be charged for a unit of product FM12 with your justifications.

iv. Identify and describe three non-financial factors which the management of Bella’s Ltd should consider before planning to operate.

Answer rating: 100% (QA)

i Annual profit based on the selling price of 60 per unit The selling price of 60 per unit is already given in the case Based on the cost and selling ... View the full answer