Relevant costs marginal costing, and short-term decision making
. D.R.I.P. manufactures and sells smart phones for £90. The variable cost of each smart phone is £60 and the fixed costs of the manufacturing operation total up to £450,000. D.R.I.P. currently sells 20,000 smart phones a year.
The company is currently looking to increase sales volumes. The marketing manager suggests that reducing the selling price by £7.50 will increase sales by 50%. All costs will remain the same, only the selling price will change.
Required:
Calculate:
a) D.R.I.P.'s current profit on sales of 20,000 smart phones at £90 each.
b) D.R.I.P.'s current break-even point and margin of safety in number of phones.
c) D.R.I.P.'s profit if the marketing manager's suggestion is adopted and sales increase by 50%.
d) D.R.I.P.'s break-even point and margin of safety at the new selling price

Should D.R.I.P. adopt the new marketing strategy?

. Blueberry is a small start-up company that produces and sells high quality handbags. Handbags currently sell for £150 and have a variable production cost of £90. Blueberry has fixed costs of £480,000.
Marketing are reviewing feedback from customers about the company's handbags and have suggested improvements to the bags that would add £50 to the selling price but increase the variable cost to produce each bag to £125. Increasing the price would cause sales of the bags to fall from the current level of 12,000 to 10,000 but would help the company improve its image as a supplier of quality bags to the high end of the market. Promoting the new image of the company's products will require additional spending on advertising of £60,000 a year. This additional advertising spending will be added to fixed costs.
Required:
Calculate:
a) Blueberry's current profit on sales of 20,000 handbags at £150 each.
b) Blueberry's current break-even point and margin of safety in number of handbags.
c) Blueberry's profit if the marketing manager's suggestion is adopted and sales decrease by 2,000 handbags.
d) Blueberry's break-even point and margin of safety at the new selling price.

Should Blueberry adopt the new marketing strategy?