Question: The variable cost of the power drill manufactured by Home tools Ltd is £4 and the selling price £10. The company expects its net profit for the year just ending to be £275,000 after charging fixed costs amounting to £85,000. The company's production capacity is not fully utilised and market research suggests three alternative strategies for the forthcoming year:

Strategy                   Reduced selling price         Sales colume expected
                                                                        to increase by

1                                     5%                                   10%

2                                     7%                                   20%

3                                    10%                                   25%

(a) Assuming the same cost structure as the current year, evaluate the alternative strategies available to the company and state which is the most profitable.

(b) Suggest other considerations which management would probably have in mind when making its decision.