Which is : -The company is considering discontinuing the manufacture of chairs a
ID: 2520074 • Letter: W
Question
Which is : -The company is considering discontinuing the manufacture of chairs and have asked you to advise them...Company Information Wood Work Ltd manufacture specialist wood furniture and sell their products all over Saudi Arabia. The company was established three years ago in Jeddah and is performing well to date. Wood work Ltd have three main product lines; TV tables, dining table and chairs. The following financial information has been provided. Financial Information TV tables dining Tables Chairs Selling Price per unit Direct Materials (wood timber) cost Kg of wood timber required per unit Direct Labour hour cost per unit Sales commission per item sold Variable manufacturing overhead per unit SAR 1,000 SAR 5,000 SAR 501 SAR 700 SAR 50 SAR 50 10 SAR 30 SAR 10 SAR 20 25 SAR 30 SAR 15 SAR 24 SAR 30 SAR 5 SAR 18 Budgeted sales in units 300 200 450 Additional Information a) Other costs: Production manager annual salary SAR 60,000 Annual marketing costs SAR 10,000 General Expenses SAR 5,000 Annual Fixed manufacturing overhead (excluding depreciation) SAR 10,000 (20% relates to TV tables) b) 1The company bought specialised equipment 3 years ago which cost SAR100,000. The useful life of this equipment is 10 years. Depreciation is allocated to manufacturing overhead expenses. The company had 8 TV tables and 100 kg of wood timber in stock at the end of June. Company policy is to maintain 20% of the following months sales level as closing inventory for c) d) finished goods. e) Company policy to maintain 25% of next months production needs as dosing inventory for direct materials f Budgeted sales of handbags for the next six months are as follows ust September October 20 November December 20 40 35 20 g) Cash collections on sales are as follows: 30% in the month of sale 70% in the month following sale Receivables at the end of June were SAR 22,000 h) Cash payments on purchases are as follows: 60% in ther month of purchase 40% in the following month
Explanation / Answer
The best way to know whether to discontinue manufacturing of chairs is to find out whehter the company is making profits or losses and even if company is making losses in the current year, is it expected to make overall profit in the future by calculating net present value of all the cash inflows.
However as that data is not availabe will have to work on profitability to check whether the chairs business should be discontinued -
Sales units - 450
Sale price - 700
Total Sales - SAR 315,000
Total per unit variable cost = Direct Material SAR 10 + Direct Labour per unit SAR 20 + Selling commission per unit sold SAR 24 + Variable manufacturing overhead SAR 18 = SAR 72
Total Varibale Cost = SAR 72 x 450 = SAR 32,400
Now fixed expense ratio is not given therfore if fixed expense > contribution then chairs should be discontinued otherwise should be
Contribution =Sales - Variable cost = SAR 282,600
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