Question 2 The condensed income statement for Low & Lee partnership business for 2017
Question 2The condensed income statement for Low & Lee partnership business for 2017 is as follows:.364px;=”” collapse;=”” 12px=””>Low & Lee PartnershipIncome StatementFor the Year Ended December 2017RMRMSales (240,000 units)1,200,000Cost of goods sold800,000Gross profit400,000Operating expenses: Selling280,000 Administration150,000430,000 Profit / (Net Loss)(30,000)A cost behaviour analysis indicates that 75% of the cost of goods sold are variable, 42% of the selling expenses are variable, and 40% of the administrative expenses are variable.(Other Instructions: Round up all calculations to 2 decimal place. Use the CVP income statement format for profit computations. Show all relevant calculations)Requirement:Compute the break-even point in total sales dollars and in units for 2017. (14 marks)Low has proposed a plan to get the partnership “out of the red” and improve profitability. He feels that the quality of the product can be substantially improved by spending RM 0.25 more per unit on better raw materials. The selling price per unit could be increased to only RM 5,25 because of competitive pressures. Low estimates that sales volume will increase by 25%. What effect would Low’s plans have on the profits and the break-even point in dollars of the partnership?(15 marks)Miss Lee was a marketing major in University. She believes that sales volume can be increased only by intensive advertising and promotional campaigns. She therefore proposed the following plan as an alternative to Low:Increase the variable selling expenses to RM 0.59 per unit.Lower the selling price per unit by RM 0.25, andIncrease the fixed selling expenses by RM 40,000Miss Lee refer to an old marketing research report that said that sales volume would increase by e60% if these changes were implemented. What effect would Miss Lee’s plan have on th profits and the break-even point in dollars of the partnership? (17 marks)Which plan would you recommend to be implemented? Explain your answer. (4 marks)
