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Exercise 10 Stay Clean Stay Clean manufactures and sells a small range of kitchen equipment. Specically, the product range contains a dishwasher (DW), a washing machine (WM) and a tumble dryer (T D). The TD is of a rather old design and has for some time generated negative contribution. It is widely expected that in one year's time the market for this design of TD will cease, as people switch to a washing machine that can also dry clothes after the washing cycle has completed. Stay Clean is trying to decide whether or not to cease the production of TD now or in 12 months' time when the new combined washing machine/drier will be ready. To help with this decision the following information has been provided: (1) The normal selling prices, annual sales volumes and total variable costs for the three products are as follows: DW WM TD $ $ $ Selling price per unit 200 350 80 Material cost per unit 70 100 50 Labour cost per unit 50 80 40 Contribution per unit 80 170 -10 Annual sales 5,000 6,000 1,200 units units units (2) It is thought that some of the customers that buy a TD also buy a DW and a WM. It is estimated that 5% of the sales of WM and DW will be lost if the TD ceases to be produced. (3) All the direct labour force currently working on the TD will be made redundant immediately if TD is ceased now. This would cost $6,000 in redundancy payments. If Stay Clean waited for 12 months the existing labour force would be retained and retrained at a cost of $3,500 to enable them to produce the new washing/drying product. Recruitment and training costs of labour in 12 months' time would be $1,200 in the event that redundancy takes place now. (4) Stay Clean operates a just in time (JIT) policy and so all material cost would (5) (6) be saved on the TD for 12 months if TD production ceased now. Equally, the material costs relating to the lost sales on the WM and the DW would also be saved. However, the material supplier has a volume based discount scheme in place as follows: Total annuai Discount expenditure $ 0-600,000 600,001-800,000 800,001-900,000 900,001-960,000 960,001 and above maul-Lo o B- Stay Clean uses this supplier for all its materials for all the products it manufactures. The gures given above in the cost per unit table for material cost per unit are net of any discount Stay Clean already qualies for. The space in the factory currently used for the TD will be sublet for 12 months on a short-term lease contract if production of TD stops now. The income from that contract will be $12,000. The supervisor (currently classed as an overhead) supervises the production of all three products spending approximately 20% of his time on the TD production. He would continue to be fully employed if the TD ceases to be produced now. Required (a) 0)) Calculate whether or not it is worthwhile ceasing to produce the TD now rather than waiting 12 months (ignore any adjustment to allow for the time value of money). Briefly describe three issues that Stay Clean should consider if it decides to outsource the manufacture of one of its future products