The summarised profit and loss statement for Abacus Plc for the last year is as follows:

Sales (10,000 units) 200,000

Direct Materials 70,000

Direct Wages 50,000

Fixed Costs:

Production overhead 40,000

Administration overhead 56,000

Selling and distribution overhead 24,000 240,000

Profit/(loss) (40,000)

At a recent board meeting the directors discussed the year's results, following which the chairman asked for suggestions to improve the situation.

Required:

Evaluate the following alternative proposals (b to e) individually from a financial point of view, using the profit and loss statement above as a starting point.

1. Calculate the existing break-even point. (3 marks)

2. Pay the salesmen a commission of 10% of sales and thus increase sales and achieve a new break-even point. (2 marks)
3. Reduce selling price by 10%, which it is estimated would increase sales volume by 30%. (3 marks)
4. Increase direct wage rates by 20%, as part of a productivity - pay deal. It is hoped that this would increase production, hence sales by 25%. (4 marks)
5. Increase sales by additional advertising of 6,000, with an increased selling price of 20%, setting a target profit margin of 10% of sales. (8 marks)
6. Discuss the reliability of the figures you have calculated taking into account the limitations of analysing costs into their fixed and variable elements. What other non-financial factors should be taken into account when evaluating the above proposals. (5 marks)

(Total: 25 marks)