PQ ltd. Is manufacturing product X and Y only. It provides the following information regarding Z. X Y Sales X – 70,000 units @ $12 $840,000 Sales Y – 90,000 units @ $8 $720,000 Total Material Cost ($259,000) $ (180,000) Total Labor Cost ($233,000 $ (372,000) Total Overheads ($190,000) $ (207,000) Profit/(Loss) $158,000 $ (39,000) Additional Information: Labor includes fixed cost $65,000 $48,000 Overheads include fixed cost $36,000 $45,000 The directors are worried about the loss of Product Y. To overcome this problem, they have asked the production manager to do something about it. The production manager gave them the following 2 options. Option 1: Selling Price of Y will be increased by $1.2 per unit. But this will cause the sales to fall by 5%. Option 2: The company should stop producing product Y. The company has to bear $20,000 as redundancy cost. The shutdown of product Y will result in saving funds for the company which could be used to market and advertise the product X. The sales of product X will be increased by 40%. Required: Calculate the revised profit of the company If Option A is selected If option B is selected Advise with reasons, which proposal the directors should choose and why.

Managerial Accounting: The Cornerstone of Business Decision-Making

7th Edition

ISBN:9781337115773

Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Chapter8: Tactical Decision-making And Relevant Analysis

Section: Chapter Questions

Problem 11MCQ: Garrett Company provided the following information: Common fixed cost totaled 46,000. Garrett...

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PQ ltd. Is manufacturing product X and Y only. It provides the following information regarding Z.

	X	Y
Sales X – 70,000 units @ $12	$840,000
Sales Y – 90,000 units @ $8		$720,000
Total Material Cost	($259,000)	$ (180,000)
Total Labor Cost	($233,000	$ (372,000)
Total Overheads	($190,000)	$ (207,000)
Profit/(Loss)	$158,000	$ (39,000)

Additional Information:

Labor includes fixed cost	$65,000	$48,000
Overheads include fixed cost	$36,000	$45,000

The directors are worried about the loss of Product Y. To overcome this problem, they have asked the production manager to do something about it. The production manager gave them the following 2 options.

Option 1:

Selling Price of Y will be increased by $1.2 per unit. But this will cause the sales to fall by 5%.

Option 2:

The company should stop producing product Y. The company has to bear $20,000 as redundancy cost. The shutdown of product Y will result in saving funds for the company which could be used to market and advertise the product X. The sales of product X will be increased by 40%.

Required:

Calculate the revised profit of the company

If Option A is selected
If option B is selected

Advise with reasons, which proposal the directors should choose and why.

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