Question
In: Accounting
Q2. A company manufactures three products, X , Y and Z. The present net annual income...
Q2. A company manufactures three products, X , Y and Z. The
present net annual income from these is:
X
Y
Z
TOTAL
GH¢
GH¢
GH¢
GH¢
Sales
50,000
40,000
60,000
150,000
Variable costs
30,000
25,000
35,000
90,000
Contribution
20,000
15,000
25,000
60,000
Fixed costs
17,000
18,000
20,000
55,000
Profit / Loss
3,000
(3,000)
5,000
5,000
The company is concerned about its poor profit performance and
it is considering whether or not to cease selling product Y. It is
felt that selling prices cannot be raised or lowered without
adversely affecting net income. GH¢5,000 of the fixed cost of Y are
direct fixed costs which would be saved if production ceased (ie
there are some attributable fixed costs). All other fixed costs, it
is considered, would remain the same.
a) Should the company cease selling the product Y? 7½
marks
b) Suppose, however, it were possible to use the resources
realized by stopping production of Y and switch to producing a new
product, W, which would sell forGH¢50,000 and incur variable costs
of GH¢30,000 and extra direct fixed costs of GH¢6,000. Should the
company switch to the production of W? 7½ marks
Solutions
Expert Solution
As we can see, when the company is producing Y, the Total profit
of the company is GHc 5,000. But, when the production of Y is
completely stopped, the company is incurring a Loss of GHc
5,000.
Hence it is adviced to CONTINUE the production of
Y.
Here, if the company produces W instead of Y, the total profit
of the company increases to GHc 9,000. This means, there is an
increase of GHc 4,000 for the company by producing W instead of
Y.
Hence the company SHOULD PRODUCE W instead of
Y.
ekkarill92 answered 2 years agoRelated Solutions
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