Hanery Ltd. manufacturing a single product is facing severe competition in selling it at $ 50 per unit. The company is operating at 60% level of activity, at which level sales are $ 12,00,000. Variable costs are $ 30 per unit. Semi-variable costs may be considered as fixed at $ 90,000 when output is nil and the variable element is $ 250 for each additional 1% level of activity. Fixed costs are $ 1,50,000 at the present level of activity, but if a level of activity of 80% or above is reached, these costs are expected to increase by $ 50,000. To cope with the competition, the management of the company is considering a proposal to reduce the selling price by 5%. You are required to prepare a statement showing the operating profit at levels of activity of 60%, 70%, 80% and assuming that : (a) the selling price remains at $ 50; and (b) the selling price is reduced by 5%. Show also the number of units which will be required to be sold to maintain the present profits if the company decided to reduce the selling price of the product by 5%.
Hanery Ltd. manufacturing a single product is facing severe competition in selling it at $ 50 per unit. The company is operating at 60% level of activity, at which level sales are $ 12,00,000. Variable costs are $ 30 per unit. Semi-variable costs may be considered as fixed at $ 90,000 when output is nil and the variable element is $ 250 for each additional 1% level of activity. Fixed costs are $ 1,50,000 at the present level of activity, but if a level of activity of 80% or above is reached, these costs are expected to increase by $ 50,000. To cope with the competition, the management of the company is considering a proposal to reduce the selling price by 5%. You are required to prepare a statement showing the operating profit at levels of activity of 60%, 70%, 80% and assuming that : (a) the selling price remains at $ 50; and (b) the selling price is reduced by 5%. Show also the number of units which will be required to be sold to maintain the present profits if the company decided to reduce the selling price of the product by 5%.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Hanery Ltd. manufacturing a single product is facing severe competition in selling it at $ 50 per unit. The company is operating at 60% level of activity, at which level sales are $ 12,00,000. Variable costs are $ 30 per unit. Semi-variable costs may be considered as fixed at $ 90,000 when output is nil and the variable element is $ 250 for each additional 1% level of activity. Fixed costs are $ 1,50,000 at the present level of activity, but if a level of activity of 80% or above is reached, these costs are expected to increase by $ 50,000.
To cope with the competition, the management of the company is considering a proposal to reduce the selling price by 5%. You are required to prepare a statement showing the operating profit at levels of activity of 60%, 70%, 80% and assuming that : (a) the selling price remains at $ 50; and (b) the selling price is reduced by 5%.
Show also the number of units which will be required to be sold to maintain the present profits if the company decided to reduce the selling price of the product by 5%.
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