QUESTION 1

Study the information given below and answer each of the following questions independently:

Calculate the margin of safety (as a percentage).

Calculate the number of units that must be sold if the company desires an operating profit of $1 350 000.

Suppose the company wants to spend $120 000 more on advertising and reduce the selling price by $4 per unit, with the expectation that the sales volume will increase by 20%. Is this a good idea? Motivate your answer.

INFORMATION

Aqua Ltd manufactures a product that sells for $54 each. Production and sales are presently 100 000 units per year. Variable manufacturing costs are $27.30 per unit, of which $5.00 per unit are for overheads. Salespersons earn a commission of 5% of sales. Fixed costs amount to $1 360 000 for manufacturing overheads and $590 000 for selling and administrative activities.