The cost reduction is to be pursued by a company which seeks to improve its competitive pricing position by an increased output from the existing plant. The current profit before tax is 15% of the sales value and 30% of the value of the capital employed. Other working ratios are: Gross margin–35%; Margin of safety–43%; and Capital turnover: 2%. The actual figures for the year are as follows:
| Total sales value Don't use plagiarized sources. Get Your Custom Essay on you are required to explain whether the proposal is favourable 609583 Get an essay WRITTEN FOR YOU, Plagiarism free, and by an EXPERT! Just from $10/Page | 30,00,000 |
| Variable costs | 19,50,000 |
| Fixed costs | 6,00,000 |
| Capital employed | 1,50,000 |
| BEP | 17,10,000 |
The proposal is to reduce sales price by 10% and 20% to the output. No change in fixed costs is expected. The cost reduction is expected to be Rs. 1,05,000.
You are required to explain whether the proposal is favourable?
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