Blackarm Ltd makes three products and is reviewing the profitability of its product line. You are given the following budgeted data about the firm for the coming year.

The company is concerned about the loss on product A. It is considering ceasing production of it and switching the spare capacity of 100000 units to Product C.
You are told:
(i) All production is sold.
(ii) 25% of the labour cost for each product is fixed in nature.
(iii) Fixed administration overheads of £900 000 in total have been apportioned to each product on the basis of units sold and are included in the overhead costs above. All other overhead costs are variable in nature.
(iv) Ceasing production of product A would eliminate the fixed labour charge associated with it and one-sixth of the fixed administration overhead apportioned to product A.
(v) Increasing the production of product C by 100000 units would mean that the fixed labour cost associated with product C would double, the variable labour cost would rise by 20% and its selling price would have to be decreased by 1.50 in order to achieve the increased sales.

Required:

(a) Prepare a marginal cost statement for a unit of each product on the basis of: (i) the original budget; (ii) if product A is deleted. (12 marks)

(b) Prepare a statement showing the total contri- bution and profit for each product group on the basis of:

(i) the original budget; (ii) if product A is deleted. (8 marks)

(c) Using your results from

(a) and

(b) advise whether product A should be deleted from the product range, giving reasons for your decision.Appendix

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Product A B C Sales (in units) 100 000 120 000 80 000 () () () Revenue 1 500 000 1440 000 880 000 Costs: Material 500 000 480 000 240 000 Labour 400 000 320 000 160 000 Overhead 650 000 600 000 360 000 1550 000 1 400 000 760 000 Profit/(Loss) (50 000) 40 000 120 000