The following information relates to Mere's budget for the year to 31 December 2012:

Fixed overheads are apportioned on the basis of direct labour hours.
The directors are worried about the loss that product M is budgeted to make and various suggestions have been made to counteract the loss, viz.:
Stop selling product M;
Increase M's selling price by 20 per cent;
Reduce M's selling price by 10 per cent;
Reduce its costs by purchasing a new machine costing £350,000, thereby decreasing the direct labour cost by £100,000 (the machine would have a life of five years; its residual value would be nil).

Required:
Evaluate each of theseproposals.

Transcribed Image Text:

Product Sales Direct materials Direct labour Variable overhead Fixed overhead М Total £000 £000 £000 000 250 1350 300 500 200 100 360 320 1100 (70) 250 700 210 100 90 20 420 280 400 200 60 40 30 200 50 40 Profit/(loss) 40 Budgeted sales (units) 140 20 25