QUESTION 3: CVP ANALYSIS AND RELEVANT COSTING

a. There are three factors that need to be considered when deciding whether certain costs are considered relevant in a short-term decision. Identify and explain each of these three factors.

b. The following information concerns a business for the past three months. 

The managers of this business are concerned about this loss and are needing some help in making decisions on what needs attention to achieve their objectives. They plan to make a profit of $30,000 in the next three months and are considering the following three proposals:

Proposal 1: Launch an advertising campaign which will cost $50,000

Proposal 2: Reduce selling price to $19

Proposal 3: Reduce variable costs by $1.50 per unit by installing more efficient equipment. This increases fixed costs by $40,000.

Required:

i. Calculate the level of sales needed to make a profit of $30,000 under the assumption that none of the three proposals is adopted; and calculate the break-even point under this assumption. Show all workings.

ii. Calculate the level of sales needed to make a profit of $30,000, and the breakeven point, for each of the three proposals using the table below. Show all workings.

iii. Provide a recommendation to the managers, using results from your calculations, as to which of these options will enable them to achieve their desired profit of $30,000 more efficiently. Include in your answer at least one limitation associated with using break-even analysis.

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