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Undugu Limited started its operations on 1 July 2010. The company manufactures a single product which sells at Sh.25 per unit. For the year ended...

      

Undugu Limited started its operations on 1 July 2010. The company manufactures a single product which sells at Sh.25 per unit. For the year ended 30 June 2011, the cost accountant presented the following data to the management:
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Selling and distribution expenses are 75% fixed
Upon examination of the above data, the management made some independent proposals.

Required:
Evaluate the following four alternative proposals and comment briefly on each:
(i) Reduce the selling price by 12%. This would result in an increase in sales volume by 50%.
(ii) Pay the salesmen a commission of 8%. This would result in an increase in sales volume to
achieve break-even point.
(iii) Increase the direct labour rate by 10% per hour. This would result in an increase in production
and sales volume by 30%. In addition, advertising costs would increase by Sh.50, 000.
(iv) Increase sales through additional advertising at a cost of Shs l00, 000, increase the selling price
by 20% and set a profit margin of 10%.

  

Answers


Kavungya
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Clearly this proposal is preferable since it is the only proposal to yield production. However, the
probability of increasing sales volume by 40% plus the risk involved from increasing fixed cost by Sh
100,000 must be considered.
Kavungya answered the question on December 16, 2021 at 09:09


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