Tag (SQ): Short-Term Decisions
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MA – L2 – Q52a – Relevant Cost and Revenue
Advise whether Okonku Enterprises should discontinue Double bed production based on contribution and profit impact.
Question
Okonku Enterprises produces Single, Double, and King size beds for sale to hotels in West Africa. Its manufacturing plant is located in Keta and is currently producing at 100% capacity. Below is the annual output and sales for each product and the associated costs.
| Product | Single bed | Double bed | King Size |
|---|---|---|---|
| Units sold | 5,000 units | 3,500 units | 4,000 units |
| Sales | GH₵ 2,500,000 | GH₵ 2,800,000 | GH₵ 3,800,000 |
| Cost | |||
| Material cost | 750,000 | 1,400,000 | 1,520,000 |
| Labour costs | 600,000 | 1,050,000 | 1,200,000 |
| Manufacturing O’head | 200,000 | 650,000 | 300,000 |
| Administrative cost | 200,000 | 100,000 | 200,000 |
| Total cost | 1,750,000 | 3,200,000 | 3,220,000 |
| Profit /Loss | 750,000 | (400,000) | 580,000 |
The Director of Okonku is of the view that the product Double bed is not doing well and must not be produced any longer. The following additional information has been provided.
(i) 40% of the labour cost for all bed types are fixed costs.
(ii) 50% of the manufacturing overhead is variable costs for all products.
(iii) 80% of the administrative cost is fixed.
Required:
(a) Advise whether the company should shut down the production of Double beds.
(b) Should the company accept the new order assuming Double beds will still be produced?
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