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Alvis Taylor has budgeted that sales of his single product – the flonal – will be 100,000 units next year.

At this level of activity, his unit variable costs are budgeted to be £50 and his unit fixed costs £25.

The sales manager estimates that the demand for flonals will increase by 1,000 units for every decrease of £1 in unit selling price (and vice versa) and that, at a unit selling price of £200, demand would be zero.

Information concerning two price increases have just been received from suppliers. One is for materials (which are included in variable costs) and one is for fuel (which is included in fixed costs).

Their effect will be to increase both the variable costs and fixed costs by 20% in total over the budgeted figures.

Alvis Taylor aims to maximise profits from his business.


(a) Calculate, before the cost increases :

(i) the budgeted contribution and profit at the budgeted level of sales of 100,000 units, and

(ii)the level of sales at which profits would be maximised and the amount of those maximum profits.

(b) Show whether, and by how much, Alvis Taylor should adjust his selling price, in respect of the increases in, respectively :

(i) fuel costs               

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