Question

Popacatapetyl Ltd manufactures 3 products, the Poppa, the Catta and the Pettle which are produced from the same basic type of production process and use similar materials and labour. The draft budget for the forthcoming year was submitted to the board, and the profit statement was as follows Poppa Catta Pettle Total 1.378.545 1485.000 Sales 868,455 32,000 269,490 207,300 72555 653,760 164,880 101.695 920,335 (51,880) Direct materials 607,500 1,530,750 473,430 Direct labour 101,250 101250 10,000 Variable overhead 275,500 Total variable costs 549,345 829,200 2,279.680 1,452,320 980,000 Contribution 675,000 Fixed overhead Profit 472,320 At a meeting of the board it was decided that in view of the pessimistic outlook for the Pettle (sales of which have been gradually falling for several years) and because there was no posibility of raising its selling price, it should become a discontinued product. Sales demand for the Poppa and Catta, on the other hand, are buoyant, and the company has so far been unable to produce sufficient of either product to meet the full demand potential. It was therefore decided that the labour force released by discontinuing production of the Pettle should be transferred; £40,500 of this transferred ]abour being switched to producing the Catta and the remainder to producing the Poppa. The increased production of the Poppa and the Catta is not expected to change heir cost/selling price relationships Required the revised profit statement which would result as a consequence of, the board's decision, arks) and cormment briefly on its effect. b) If we believe that potential sales demand for both the hat the company is working at full labour capacity, what other possible cour Board wish to consider? You may assurme that the additional sales of either product would be at the existing selling price. Poppa and the Catta is extremely high but marks)

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Answer 1

a) Revised Statement of Profit:
	Poppa	Catta	Total		calculation for Poppa
Sales	2205672	2079000	4284672		1378545*B7/207300
Less: Variable Costs:
DM	431184	850500	1281684		269490*B7/207300
DL	331680	141750	473430		207300+164880-40500
VOH	116088	141750	257838		72555*B7/207300
Total Variable costs	878952	1134000	2012952
Contribution	1326720	945000	2271720
Fixed Overhead			980000
Profit			1291720
Discontinuing The Pettle will result in increase
in the profit from 472320 to 1291720, so the company
should produce at per board's decision.
b) In the case of the company is working at full labour capacity
then the company can opt the use of labour force released from
the discontinuing the product Pettle towards the higher contributor
to the profit of the company ie. Poppa instead of other product, Catta.