7 Increasing sales and production levels When an opportunity to increase sales and production levels arises in a business the key question to answer is:
What will be the effect upon net profit? Will the:
§ increased contribution (sales less variable costs) generated by the increased sales exceed any additional fixed costs that will be incurred as a result of the increased sales level?
If the answer is ‘yes’ the opportunity should normally be pursued.
Illustration 8 – Equation including volume-based discounts
An opportunity arises to increase sales by 10,000 units:
§ Selling price of additional units = $10
§ Variable cost of additional units = $6
§ Fixed costs will increase by = $50,000
The effect of the increased sales would be to reduce net profits by $10,000.
§ $100,000 increased sales
§ $60,000 increased variable costs = $40,000 additional contribution
§ less additional fixed costs of $50,000 = $10,000 reduction in net profit.
Based on this analysis, the opportunity should be rejected.
However, other factors need to be considered such as:
§ the impact on future sales beyond the current period
§ the impact of rejection on customer goodwill
§ whether the extra sales would help build the firm’s brand.
Illustration 9 – Increasing sales and production levels
An alternative is a tabular approach showing profits at different activity levels
Tabular approach – increasing production and sales
§ XYZ Ltd is introducing a new product.
§ Details of the costs are as follows:
- Hire costs – hiring the machinery to manufacture the product will cost $200,000 pa. This machine will enable 60,000 units pa to be produced.
- Additional machines can be hired at $80,000 pa. Each machine hired enables capacity to be increased by 20,000 units pa, but it is not possible to increase production beyond 90,000 units because of shortage of space.
- The minimum rental period is for one year and the variable cost is estimated to be $6 per unit produced. |
发表于 2012-2-23 17:09:42
