Question 3: CVP A company makes a single product and its contribution per unit is...
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Question 3: CVP A company makes a single product and its contribution per unit is 16. Weekly fixed costs are 20,000 and weekly profit is 44,000. The contribution to sales ratio is 40%. The companys capacity is not fully utilised and the directors are considering reducing the price in an effort to increase sales. Market research has indicated the following effect on sales; Reducing the price by 2% would achieve an increase in weekly sales of 10% Reducing the price by 5% would achieve an increase in weekly sales of 18% Reducing the price by 7% would achieve an increase in weekly sales of 25% The company has no stocks of finished goods.
Required: a) Calculate the current selling price and the current weekly sales in units [8 marks] b) Determine which of the price reductions would maximise profits, clearly showing the maximum profit that can be made next week [10 marks] c) Discuss the possible practical problems that may also influence your recommendations. [7 marks] Total: 25 marks
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