The following information relates to Mere’s budget for the year to 31 December 2018: 

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 these proposals. 

Transcribed Image Text:

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