T ltd Produce a product X. Present level of production is 2000 units pa as against the installed capacity of 3000 units pa. The present cost structure is as under

Materials for 2000 units US$ 200,000

Labour for 2000 units 100,000

Variable overheads for 2000 units 20,000

Fixed overheads including Depreciation 150,000

Fixed overheads include US$ 40,000 for depreciation. Product X is sold at US$ 300 per unit.

It is proposed to manufacture product Y along with product X.

The installed capacity of product Y will be 1500 unit. This will require an additional investment of US$ 250,000 in machine over and above existing investment of US$ 500,000.

At the start 1,000 units will be manufactured & sold at a price of US$ 200 each.

Fixed overheads would be US$ 15,000 apart from 10% depreciation on machine.

US$ 50,000 will be required for working capital.

The cost estimates of Y product

Material US$ 100 per unit

Labour US$ 30 per unit

Variable overheads US$ 10 per unit

Is it advisable to introduce product Y? Should other considerations be made?

Answer rating: 100% (QA)

To assess whether it is advisable to introduce product Y and whether other considerations should be made lets analyze the financial implications and p... View the full answer