This business/management problem is solved step by step below, with detailed explanations to help you understand the method and arrive at the correct answer.
ScanSolve AI Answer
To decide whether the proposals should be pursued, we will calculate the current net profit and then the net profit under each proposal. Step 1: Calculate the current net profit. Sales revenue = 100,000 units × GH¢8/unit = GH¢800,000 Total Variable Costs = Material + Labour = GH¢300,000 + GH¢200,000 = GH¢500,000 Contribution = Sales Revenue - Total Variable Costs = GH¢800,000 - GH¢500,000 = GH¢300,000 Fixed Costs = GH¢150,000 Current Net Profit = Contribution - Fixed Costs = GH¢300,000 - GH¢150,000 = GH¢150,000 Step 2: Evaluate Proposal a) - Advertising Campaign. New sales volume = 150,000 units New selling price = GH¢7/unit New advertising cost (fixed) = GH¢14,000 New Sales Revenue = 150,000 units × GH¢7/unit = GH¢1,050,000 Current Variable Cost per unit = GH¢500,000 / 100,000 units = GH¢5/unit New Total Variable Costs = 150,000 units × GH¢5/unit = GH¢750,000 New Contribution = GH¢1,050,000 - GH¢750,000 = GH¢300,000 New Total Fixed Costs = Original Fixed Costs + Advertising Cost = GH¢150,000 + GH¢14,000 = GH¢164,000 Net Profit (Proposal a) = New Contribution - New Total Fixed Costs = GH¢300,000 - GH¢164,000 = GH¢136,000 Step 3: Evaluate Proposal b) - Produce components internally. Sales volume and selling price remain unchanged. Material costs reduce by 20%. Fixed costs increase by GH¢72,000. Sales Revenue = GH¢800,000 (unchanged) Current Material Cost per unit = GH¢300,000 / 100,000 units = GH¢3/unit New Material Cost per unit = GH¢3 × (1 - 0.20) = GH¢3 × 0.80 = GH¢2.40/unit New Total Material Cost = 100,000 units × GH¢2.40/unit = GH¢240,000 Labour Cost = GH¢200,000 (unchanged) New Total Variable Costs = GH¢240,000 + GH¢200,000 = GH¢440,000 New Contribution = Sales Revenue - New Total Variable Costs = GH¢800,000 - GH¢440,000 = GH¢360,000 New Total Fixed Costs = Original Fixed Costs + Increase in Fixed Costs = GH¢150,000 + GH¢72,000 = GH¢222,000 Net Profit (Proposal b) = New Contribution - New Total Fixed Costs = GH¢360,000 - GH¢222,000 = GH¢138,000 Step 4: Decision and Justification. Current Net Profit: GH¢150,000 Net Profit (Proposal a): GH¢136,000 Net Profit (Proposal b): GH¢138,000 Both proposals result in a lower net profit than the current forecast. Therefore, neither proposal should be pursued. The final answer is Neither Proposal a) nor Proposal b) should be pursued, as both result in a lower net profit compared to the current forecast of GH¢150,000. Proposal a) yields GH¢136,000 and Proposal b) yields GH¢138,000. What's next?