Greatsound Ltd manufactures and sells compact disc players, the cost of which is made up as follows:

The current selling price is £187.

Greatsound Ltd works a day shift only, at present producing 120,000 compact disc players per annum, and has no spare capacity. 

Market research has shown that there is a demand for an additional 60,000 compact disc players in the forthcoming year. However, these additional sales would have a selling price of £150 each.

One way of achieving the extra production required is to work a night shift. However, this would increase fixed costs by £2,500,000 and the labour force would have to be paid an extra 20 per cent over the day shift rate.

The company supplying the materials to Greatsound Ltd has indicated that it will offer a special discount of 10 per cent on total purchases if the annual purchases of materials increase by 50 per cent. The selling price and all other costs will remain the same.

Assuming that the additional purchases will only be made if the night shift runs, you are required to:

(a) Advise Greatsound Ltd whether it should proceed with the proposal to commence the night shift, based on financial considerations.

(b) Calculate the minimum increase in sales and production required to justify the night shift.

(c) Give four other matters which should be taken into consideration when making a decision of this nature.

Transcribed Image Text:

Direct material Direct labour Variable overhead Fixed overhead Total cost f 74.80 18.70 7.50 30.00 131.00