a) Define and briefly explain two of the basic process decisions. (4 marks) b) U
ID: 326992 • Letter: A
Question
a) Define and briefly explain two of the basic process decisions. (4 marks) b) Ultimate Fit Limited is a garment manufacturer producing among other types of clothing Polo Shirts. These shirts enjoy good volumes of sales, however, the overall contribution to the profitability of the business is somewhat low. In 2009 the company produced and sold 17,500 polo shirts at a selling price of $22 per shirt. Fixed cost is $80,000 and variable cost is S18. PTO age a Question 2 continued What is the break-even point in units for the polo shirts? The management of the company has recognized that they must either increase sales of the shirts or decrease variable costs. They believe that they can increase sales by 30 percent or that they can reduce variable cost by 85 percent. Which alternative would result in the higher contribution to profit, assuming that each is equally costly to implement? (3 marks) i) ii) (7 marks) (6 marks) iii) what is the present change in the per unit profit contribution generated by each alternative nput (ii) above?Explanation / Answer
A) Two of the most basic Process decisions can be decribed as follows-
B) Selling Price = 22
Variable Cost = 18
Fixed Cost = 80000
1) Break even Point = Fixed Cost/(Selling Price - Variable Cost) = 80000/(22-18) = 20000
2) On 30% Increase in Sale, Increase in Profit = 0.3*(Selling Price-Variable Cost)*Quantity = 0.3*(22-18)*Q = 1.2Q
On 85% Decrease in Variable Cost, Profit = (Selling Price - (0.15*Variable Cost))*Quantity - Fixed Cost= (22-18*0.15)*Q -Fixed Cost = (22-2.7)*Q -Fixed Cost= 19.3Q -Fixed Cost
Increase in Profit in second condition= 19.3Q - 4Q = 15.3Q
For any value of Q, we can conclude that the Second alternative provides more profit increase.
3) Putting Q=1 in the Increase in Profit from each alternative we get,
Change in per-unit Profit Contribution for 1st alternative = 1.2
Change in per-unit Profit Contribution for 2nd alternative = 15.3
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