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Blunt Corporation manufactures calculators, involving a product line of two models. The current price charged for its B1 model is £8, and profit contribution is 25 per cent. Sales have been disappointing for this model, so Blunt is considering a quality improvement at a cost of 50p. per calculator. Advertising would be increased by £40,000 to promote the improvement. Current profit is £60,000 on sales of 80,000 items per month. There is a relationship between sales of B1 and B2 models, such that for every four extra sales of a B1 model there is one less sale of a B2 model, as some consumers switch from one model to the other. The B2 models sell for £6 and have an average variable cost of £5. a. Determine the cost function for the B1 model with the changes that Blunt is considering. b. Calculate the increase in sales of B1 models necessary with the quality improvement in order to earn increased profits of £40,000, ignoring the effect on sales of B2 models. c. Calculate the increase in sales of B1 models necessary with the quality improvement in order to earn increased profits of £40,000, taking into account the effect on sales of B2 models.
2. Haedoo is presently struggling to survive in the motor car industry. Competition is increasing and the company is plagued by overcapacity. Its capacity is 2 million units per year, but it is currently operating at only 70 per cent of this level, and this is resulting in an annual loss of $480 million. Its profit contribution per unit is 25 per cent. Haedoo has now set targets for its performance in two years’ time: it aims to reduce its capacity to 1.5 million units and operate at 80 per cent of this level; it aims to have a profit of $800 million; and in order to achieve its target output and sell it, it aims to keep its prices the same, while reducing its level of unit variable costs to 90 per cent of their current level by rationalizing its supply procedures and standardizing components.
a. Calculate the target average level of price for Haedoo.
b. Calculate the target level of unit variable costs.
c. Calculate the target level of break-even output.
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