PROBLEM:

Mirza & Co manufactures and sells 3,500 units of product “A” at a selling price of Rs. 30 per unit. Fixed Cost Rs. 45,000 and variable cost Rs 10 per unit incurred to manufacture the product A.

Management of Mirza & Co. is anxious to improve the company’s profit performance and has asked for analysis of a number of items.

Required: Scenario 1: Calculate contribution margin and net profit with the help of given data. Scenario 2: Refer to original data;the management feels that due to increase of advertising budget by Rs. 30,000 (this cost is considered as fixed cost) would increase sales volume of product “A” by 20%. Should the advertisement budget be increased and show complete calculation of contribution margin and net profit with these changes?

Also compare the findings of scenario 2 with scenario 1and suggest which scenario is more profitable.