Question three (CIMA Adapted)

The summarized profit and loss statement for Mango Plc for the last year is as follows:

(US$'000) (US$'000)

Sale (50,000 units) 1000

Direct materials 350

Direct wages 200

Fixed production overhead 200

Variable production overhead 50

Administration overhead 180

Selling and distribution overhead 120

1,100

Profit/loss (100)

At recent board meeting the directors discussed the year's results, following which the chairman

asked for suggestions to improve the situation.

You are required as management accountant, to evaluate the following alternative proposals and to recommend briefly on each:

(a)Pay sales men a commission of 10% of sales and thus increase sales to achieve break- even point

(b)Reduce selling price by 10%, which is estimated would increase sales volume by 30%

(c)Increase direct wage rates/ from US$4 to US$5 per hour, as part of a productivity/pay deal. It is hoped that this would increase production and sales by 20% advertising costs would increase by 50,000

(d)Increase sales by additional advertising of US$300,000 with increased selling price of 20%, setting a profit margin of 10%