Critically evaluate four of the basic assumptions of the Cost Volume Profit model used in part (a), with particular focus on the retail industry..
Question 1
Nyom Plc makes and sells children’s shoes. The Managing Director is reviewing the budget for its best-selling sandals for the coming year as the company is considering how it might improve its performance. The original budget shows expected sales to be 80,000 units. At an average price of £50, total sales would therefore be £4,000,000. At this level of sales, variable costs will be £1,600,000 and fixed costs will be £1,400,000.
Ben Foster, the Director of Sales suggests that if the price of the sandals were reduced to £40, then he estimates that the sales volume would increase by 50%.
Joan Greening, the Director of Marketing, has a different opinion. She believes that the best way to increase sales is to have an increased marketing drive across all their current markets. She reckons that to increase sales by 20% it would need an additional marketing push costing £200,000.
The board has asked for some figures and advice to help it decide which of the three strategies to adopt:
1.
Remain with the original budget
2.
Adopt Ben’s,
3.
Adopt Joan’s
(Each alternative should be considered independently.)
Required
You are required for each of the three strategies to:
a)
Using the Cost Volume Profit model Determine :
(i) The profit
(ii) The breakeven point in £’s and units
(iii) The margin of safety
(iv) The sales level that would be required if the company wished to
make a profit of £1,400,000
(15%)
b)
Evaluate the figures that you have determined for each strategy in part (a) above, and advise the Board on which strategy they should pursue and why.
(25%)
c)
Critically evaluate four of the basic assumptions of the Cost Volume Profit model used in part (a), with particular focus on the retail industry.
(30%)
d) With examples, describe the different ways of classifying costs and explain how viewing cost in different ways assists management decision making within the retail sector.