Decision on whether to launch a new product A company is currently manufacturing at only 60%

of full practical capacity, in each of its two production departments, due to a reduction in market share. The company is seeking to launch a new product which it is hoped will recover some lost sales.

The estimated direct costs of the new product, Product X, are to be established from the following information:

Direct materials:

Every 100 units of the product will require 30 kilos net of Material A. Losses of 10% of materials input are to be expected. Material A costs £5.40 per kilo before discount. A quantity discount of 5% is given on all purchases if the monthly purchase quantity exceeds 25 000 kilos. Other materials are expected to cost £1.34 per unit of Product X.

Separate overhead absorption rates are established for each production department. Department |
overheads are absorbed at 130% of direct wages, which is based upon the expected overhead costs and usage of capacity if Product X is launched. The rate in Department 2 is to be established as a rate per direct labour hour also based on expected usage of capacity. The following annual figures for Department 2 are based on full practical capacity:

The selling price for Product X is expected to be £9.95 per unit, with annual sales of 2 400 000 units.
Required:

(a) Determine the estimated cost per unit of Product X. (13 marks)

(b) Comment on the viability of Product X.
(7 marks)

(c) Market research indicates that an alternative selling price for Product X could be £9.45 per unit, at which price annual sales would be expected to be 2900000 units. Determine, and comment briefly upon, the optimum selling price. (5 marks)
(Total 25 marks)
ACCA Cost and Management Accounting |

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Direct labour (per hundred units): Department 1: 40 hours at 4.00 per hour. Department 2: 15 hours at 4.50 per hour.