Mahmood, the finance manager, argued that it is wrong decision to reduce the selling price of the personalized mugs the houseware department manufactures. He said that reducing the price does not give them advantage over the competitors. However, Ahmed Ali explained that the selling price reduction gives lower contribution margin but increases the inventory turnover. Relevant to this, he gave the following production data. The houseware department manufactures personalized mugs used as token on various corporate events. There were 2,000 mugs sold for OMR 3.950 each in 2019. Cost Unit price in OMR Direct materials OMR 1.100 Direct labour OMR 0.900 Variable overhead OMR 0.100 Variable selling costs OMR 0.150 Fixed manufacturing OMR 2,200 Fixed non-manufacturing costs OMR 2,200 Fixed selling expenses OMR 500 1. Based from the given data, prepare the income statement using the variable and absorption costing. 2. If Ahmed Ali decides to reduce the selling price of the product to OMR 3, prepare the income statement using both the costing methods. 3. Discuss whether the decision to reduce the selling price is favorable or unfavorable. 2 4 Ahmed Ali, the operations manager of Muscat Traders, is not fully convinced that he will be removed from his post any time soon. After he received a letter from the CEO asking for clarifications on the various major decisions he made, he felt that everyone is iust perplexed by the implementations of the various performance management tools. He was given by the CEO three days for complete explanation. He hired you as a consultant on this matter. The following details were made clear by Ahmed Ali: 2. Fathma, the marketing manager, asked for the equal production of the various sizes of bed sheets that the home decoration department manufactures. According to Ahmed Ali, there is limited supply of raw materials used in the production. The decision comes after the preparation of the production budget. He presented to you the following production data. The home decoration department of the company produces three sizes of bed sheets. The sheet is made from linen fabric that costs OMR 0.550 per metre. The workers are paid for OMR 0.200 per hour. The company incurred fixed costs of OMR1,200 in 2019. The production data for 2019 follows: Queen Twin 1.3 King 2.5 2 Size Direct material (metre per unit) Direct labour (hours per unit) Direct expenses (per unit) Selling price per unit 2 2.5 3 OMR 4 OMR 2 OMR 5 OMR 2.5 OMR5 OMRS The supply of linen fabric is limited to 1,000 metres. The budget production (based upon maximum demand) follows: Twin (200 bed sheets); Queen (220 bed sheets) and King (180 bed sheets)
