Puzzled Limited would like to increase its sales during the year to 3l May 2012. To do so, it has several mutually exclusive options open to it:
Reduce the selling price per unit by 15 per cent;
Improve the product resulting in an increase in the variable cost per unit of ?L1.30;
Spend ?L15,000 on an advertising campaign;
Improve factory efficiency by purchasing more machinery at a fixed extra annual cost of ?L22,500.
During the year to 31 May 2011, the company sold 20,000 units. The cost details were as follows:
?L000
Sales ………………………………….200
Variable costs ………………………..150
Contribution …………………………. 50
Fixed costs …………………………… 40
Profit …………………………………. 10
These cost relationships are expected to hold in 2012.
Required:
State which option you would recommend and why.