The cost reduction is to be pursued by a company which seeks to improve its competitive pricing position by an increased output from the existing plant. The current profit before tax is 15% of the sales value and 30% of the value of the capital employed. Other working ratios are: Gross margin–35%; Margin of safety–43%; and Capital turnover: 2%. The actual figures for the year are as follows:
|
Total sales value |
30,00,000 |
|
Variable costs |
19,50,000 |
|
Fixed costs |
6,00,000 |
|
Capital employed |
1,50,000 |
|
BEP |
17,10,000 |
The proposal is to reduce sales price by 10% and 20% to the output. No change in fixed costs is expected. The cost reduction is expected to be Rs. 1,05,000.
You are required to explain whether the proposal is favourable?