Decision-making and non-graphical cvp analysis

Question

Problem:

Decision-making and non-graphical CVP analysis

Fosterjohn Press Ltd is considering launching a new monthly magazine at a selling price of £1 per copy. Sales of the magazine are expected to be 500 000 copies per month, but it is possible that the actual sales could differ quite significantly from this estimate.

-- Two different methods of producing the magazine are being considered and neither would involve any additional capital expenditure. The estimated production costs for each of the two methods of manufacture, together with the additional marketing and distribution costs of selling the new magazine, are summarized below:

	Method A	Method B
Variable costs	£0.55 per copy	£0.50 per copy
Specific fixed costs	£80 000	£120 000
	per month	per month
Semi-variable costs:

The following estimates have been obtained:

350 000 copies	£55 000	£47 500
	per month	per month
450 000 copies	£65 000	£52 500
	per month	per month
650 000 copies	£85 000	£62 500
	per month	per month

It may be assumed that the fixed cost content of the semi-variable costs will remain constant throughout the range of activity shown.

The company currently sells a magazine covering related topics to those that will be included in the new publication and consequently it is anticipated that sales of this existing magazine will be adversely affected. It is estimated that for every ten copies sold of the new publication, sales of the existing magazine will be reduced by one copy.

Sales and cost data of the existing magazine are shown below:

Sales	220 000 copies per month
Selling price	£0.85 per copy
Variable costs	£0.35 per copy
Specific fixed costs	£80 000 per month

Required:

(a) Calculate, for each production method, the net increase in company profits which will result from the introduction of the new magazine, at each of the following levels of activity:

500 000 copies per month

400 000 copies per month

600 000 copies per month

(b) Calculate, for each production method, the amount by which sales volume of the new magazine could decline from the anticipated 500 000 copies per month, before the company makes no additional profit from the introduction of the new publication.

(c) Briefly identify any conclusions which may be drawn from your calculations.