T ltd Produce a product X. Present level of production is 2000 units pa as against the
Question:
T ltd Produce a product X. Present level of production is 2000 units pa as against the installed capacity of 3000 units pa. The present cost structure is as under
Materials for 2000 units US$ 200,000
Labour for 2000 units 100,000
Variable overheads for 2000 units 20,000
Fixed overheads including Depreciation 150,000
Fixed overheads include US$ 40,000 for depreciation. Product X is sold at US$ 300 per unit.
It is proposed to manufacture product Y along with product X.
The installed capacity of product Y will be 1500 unit. This will require an additional investment of US$ 250,000 in machine over and above existing investment of US$ 500,000.
At the start 1,000 units will be manufactured & sold at a price of US$ 200 each.
Fixed overheads would be US$ 15,000 apart from 10% depreciation on machine.
US$ 50,000 will be required for working capital.
The cost estimates of Y product
Material US$ 100 per unit
Labour US$ 30 per unit
Variable overheads US$ 10 per unit
Is it advisable to introduce product Y? Should other considerations be made?
Financial Reporting Financial Statement Analysis and Valuation a strategic perspective
ISBN: 978-1337614689
9th edition
Authors: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw