Submarine Cables makes mobile telephones for underwater use. The budgeted revenues and costs for the year ended 30 June 2004 are as follows:
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Revenues
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£600,000
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Variable costs
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420,000
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Fixed costs
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150,000
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Net profit
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30,000
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Capital employed will be £600,000. Budgeted output for the year ended 30 June 2004 is 30,000 units, which represents 60% of output capacity.
The management of the company are concerned about the low level of budgeted profit and return on capital employed. They have asked you to analyse and evaluate the follow- ing independent options for improving performance:
(a) An enquiry has been received from a wholesaler in Kazakhstan who has indicated that he is prepared to take 12,000 units at a price of £16 per unit, with Submarine Cables paying the carriage and customs charges estimated at £2000. Submarine Cables has never previously dealt with this wholesaler or this distant market.
(b) Reduce selling price by 10%. It is thought that this will increase demand to capacity. However, it will need to be supported by a new system of sales- men's commissions; these will be 50 pence per unit sold in 2000/2001.
(c) The managing director believes in setting targets and has announced a profit target of 10% of capital employed. The managing director wants to know what price increase is necessary to achieve the target with the current level of sales, and what sales increase is necessary to achieve the target with the current price per unit.
(d) A machine may be leased at a cost of £15,000 per annum. The machine will cause variable costs to fall by 50% per unit; it will also increase current capa- city by 20%.
For each option (a)-(d), determine whether it is financially worthwhile and comment on its non-financial aspects.