Company Information

Wood Work Ltd manufacture specialist wood furniture and sell their products all over Saudi Arabia. The company was established three years ago in Jeddah and is performing well to date. Wood work Ltd have three main product lines; TV tables, dining table and chairs. The following financial information has been provided.

Financial Information

	TV tables	dining Tables	Chairs
Selling Price per unit	SAR 1,000	SAR 5,000	SAR 700
Direct Materials (wood timber) cost	SAR 50	SAR 50	SAR 50
Kg of wood timber required per unit	10	25	5
Direct Labour hour cost per unit	SAR 30	SAR 30	SAR 30
Sales commission per item sold	SAR 10	SAR 15	SAR 5
Variable manufacturing overhead per unit	SAR 20	SAR 24	SAR 18
Number of labour hours per unit	3	4	2
Budgeted sales in units	300	200	450

Additional Information:

a)Other costs:

Production manager annual salary SAR 60,000

Annual marketing costs SAR 10,000

General Expenses SAR 5,000

Annual Fixed manufacturing overhead (excluding depreciation) SAR10,000 (20% relates to TV tables )

b)The company bought specialised equipment 3 years ago which cost SAR100,000. The useful life of this equipment is 10 years. Depreciation is allocated to manufacturing overhead expenses.

c)The company had 8 TV tables and 100 kg of wood timber in stock at the end of June.

d)Company policy is to maintain 20% of the following months sales level as closing inventory for finished goods.

e)Company policy to maintain 25% of next months production needs as closing inventory for direct materials.

f)Budgeted sales of handbags for the next six months are as follows:

July	August	September	October	November	December
40	35	20	20	20	20

g)Cash collections on sales are as follows:

30% in the month of sale

70% in the month following sale

Receivables at the end of June were SAR 22,000

h)Cash payments on purchases are as follows:

60% in the month of purchase

40% in the following month

Payables at the end of June were SAR 6,000

i)The closing cash balance in June 2017 was SAR 40,000 and it is company policy to maintain cash at this level at the end of each month.

j)The company have access to a 4% bank loan of SAR 60,000

k)The company paid a dividend of SAR 40,000 in August

l)Cash of SAR 50,000 was invested in the company by a private investor in September.

Requirement:

Q1) The company is considering discontinuing the manufacture of chairs and have asked you to advise them on this decision. (35% of annual marketing costs relate specifically to this product and SAR1,500 of general expenses is directly attributable to this product?