Quality Product Ltd has drawn up the following budget for the year 1998–99:
|
|
|
|
Raw Material |
20,00,000 |
|
Labour, Store, Power and other Variable Costs |
6,00,000 |
|
Fixed Manufacturing Overheads |
7,00,000 |
|
Packing and Variable Distribution Cost |
4,00,000 |
|
Fixed General Overheads Including Selling |
3,00,000 |
|
40,00,000 |
|
|
Sales Revenue @ Rs. 50 per unit |
50,00,000 |
|
Budgeted Profit |
10,00,000 |
The General Manager suggests to reduce the selling price by 5% and expects to achieve an additional volume of 5%. The more intensive manufacturing programme will involve additional costs of Rs. 50,000 for production planning. It will also be necessary to open an additional sales office at the cost of Rs. 1,00,000 per annum.
The Sales Manager, on the other hand, suggests to increase the selling price by 10% which, it is estimated, will reduce the sales volume by 10%. At the same time, a saving in the manufacturing overheads and general overheads of Rs. 50,000 and Rs. 1,00,000 per annum, respectively, is expected on this reduced volume.
Which of these two proposals would you accept and why? Show the complete working.