A decision has to be taken by a firm whether or not to initiate manufacture of a new product called Sony. The following data has been established;
1. A market research study carried out three month ago into the sales potential of Sony cost ¢25,000.00.
2. A new machine would be required to be purchased at a cost of ¢100,000.00 solely to make Sony. A nil scrap value is anticipated and it is the firm’s policy to write off depreciation on a straight line basis over 5 years.
3. Sony would be manufactured in a factory owned by the firm, the annual depreciation charged of which is ¢8,000.00. A present the factory is sublet at 17,500.00 per annum.
4. The labour required at Sony are;
NORMAL WAGE RATES PER HOUR
DETAILS HOURS/UNIT OF SONY FIRST YEAR SUBSEQUENT YEAR
Skilled 4 8.00 8.50
Semi-skilled 3 7.20 7.60
Unskilled 2 6.80 6.85
It is expected that  there would be shortage of skilled labour in the first year only, so the manufacture of Sony, will make it necessary for the skilled labour to be diverted from other work on which a contribution of ¢450.00 per hour is earned, net of wage cost. The firm currently has a surplus of semi-skilled labour paid at full rate but doing unskilled work. The labour concerned could be transferred to provide sufficient labour for the manufacture of Sony and will be replaced by unskilled labour.
5. Overhead cost are allocated to manufacture at the rate ¢18.00 per skilled labour hour as follows;
Fixed Overheads 13.00
Variable Overheads   5.00
            ¢18.00
6. The manufacture and sale of Sony is expected to cost sales of an existing product, King to fall by 3,000 units per annum. The contribution on King is ¢9.00 per unit.
7. The manufacturer of Sony would required the services of an existing manager, who would be paid ¢32,000 per annum. If not required for Sony, the manager would be made redundant and would received ¢3,000 per annum a service agreement.
Require:
What is the relevant cost from the above data in deciding whether or not to manufacture Sony?
Decision involving Marginal Costing
Revenue xxx
Variable Cost xxx
Contribution xxx
Fixed Cost xxx
Profit xxx

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