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)

Please, I need the answer and the approaches step by step( all the information about how to get the data) in an easy way for my understanding Thanks!

Answer 1

Since the cost/ selling relationships to remain same, therefore %age increase in labor costs would mean same %age increase in sales due to more production and same increase in other related costs.

40500 labor cost allocated to Catta, therefore %age increase in labor costs = 40500/101250 x 100 = 40%

& remaining (164880 - 40500) i.e. 124380 labor cost allocated to Poppa, therefore percentage increase = 124380 / 207300 x 100 = 60%

	Poppa (160%)	Catta (140%)	Total
Sales	€   2,205,672.00	€     2,079,000.00	€   4,284,672.00
Direct Material	€       431,184.00	€         850,500.00	€   1,281,684.00
Direct Labor	€       331,680.00	€         141,750.00	€       473,430.00
Variable Overhead	€       116,088.00	€         141,750.00	€       257,838.00
Total Variable Costs	€       878,952.00	€     1,134,000.00	€   2,012,952.00
Contribution	€   1,326,720.00	€         945,000.00	€   2,271,720.00
Fixed Overhead			€       980,000.00
Profit			€   1,291,720.00

Since Labor costs of Catta increased by 40%, revised figures have been stated at 140% of original figures and similarly for Poppa 160% as increase in labor costs was 60%

(b) The other alternative to the company is to purchase the product from outside at a maximum price equivalent to Contribution per unit.