Intermediate: Deleting a segment and determining optimum output with a limiting factor

(a) Next years forecasted trading results for Caribee Ltd, a small company manufacturing three different types of product, are shown below:

Required:
(i) Explain how the company's forecasted profits would be affected if product C were discontinued. It should be assumed that sales of the remaining products would not be affected; any other assumptions made should be included with your explanation. (4 marks)
(ii) Additional advertising for product B would cost £8000 next year; this amount is not included in the forecasts shown above. Calculate the minimum extra sales, in units, of product B required to cover this additional ~ ~~~
(iii) Calculate the increase in sales volume of product A necessary to compensate for a 10% reduction in the selling price of the product. Carefully explain why the increase in volume is proportionately greater than the reduction in selling price. (5 marks)

(b) The production director of Caribee ltd has just been informed that next year's supplies of a material used in the manufacture of each of the three products will be restricted to 92000 kg; no substitute material is available and the estimated consumption of this restricted material, per product, is:

The sales director estimates that the maximum demand for each product is that which is shown in the original forecast in

(a) above; also he decides that advertising or adjustments to selling price are not possible.

Assume that stocks of materials, work in progress or finished goods cannot be carried.
Required:
Calculate the optimum quantities of products A, B and C which should be manufactured next year in order to maximize company profits.

Transcribed Image Text:

Product Product Product A B C Total Selling price, per unit 10 12 8 (000) (000) (000) (2000) Sales 100 96 32 228 Variable cost of sales: Prime cost 40 38 13 91 Variable overhead 20 18 11 Share of general fixed overhead 30 Profit/(loss) 10 22 27 10 13 (2) 562 49 67 21