QUESTION TWO

Blackman LTD makes three products and is viewing the profitability of its product line.

You are given the following budgeted data about the firm for the coming year.

The company is concerned about the loss on product $A.$ it is considering ceasing

production of it and switching the spare capacity of $100000$ units to product $C.$

YOU ARE TOLD:

$($i$)$ All production is sold

$($ii$)25\%$ of the labour cost for each product is fixed in nature.

$($iii$)$ Fixed administration overheads ofK$900,000$ in total have been apportioned to

each product on the basis of units sold and are included in the overhead

costs above. All other overhead costs are variable in nature.

$($iv$)$ Ceasing production of product A would eliminate the fixed labour charge

associated with it and one$-$sixth of the fixed administration overhead

apportioned to product $A.$

$($v$)$ Increasing the production of product c by $100000$ units would mean that the

fixed labour cost would rise by $20\%$ and its selling price would have to be

decreased by K$1\mathrm{.}50$ in order to achieve the increased sales.

REQUIRED:

$($a$)$ Prepare a marginal cost statement for a unit of each product on the basis of

$($i$)$ The original budget;

$($ii$)$ If product $A$ is deleted.

$($b$)$ Prepare statement showing the total contribution and profit for each product

group on the basis of

$($i$)$ The original budget;

$($ii$)$ If product $A$ is deleted

$[8$ marks $]$

$($c$)$ Using your results from $($a$)$ and $($b$)$ advise whether product A should be deleted

from the product range, giving reasons for your decisions

$[5$ marks $]$