Question
Montrose Glass Products Limited manufactures three ranges of quality paperweights Basic, Standard and Deluxe. Its accountant has prepared a draft budget for Year 7 Basic
Montrose Glass Products Limited manufactures three ranges of quality paperweights Basic, Standard and Deluxe. Its accountant has prepared a draft budget for Year 7
| Basic | Standard | Deluxe | Total |
| 000s | 000s | 000s | 000s |
Revenue | 45 | 35 | 40 | 120 |
Material | 15 | 10 | 10 | 35 |
Labour | 20 | 15 | 5 | 40 |
Variable overhead | 5 | 12 | 5 | 22 |
Fixed overhead | 9 | 5 | 6 | 20 |
| 49 | 42 | 26 | 117 |
Profit/Loss | (4) | (7) | 14 | 3 |
Fixed overheads are allocated to reach product line on the basis of direct labour hours.
The directors are concerned about the viability of the company and are currently considering the cessation of both the Basic and Standard ranges since both are apparently making losses.
Required
- If the directors close down only the manufacture of Basic paperweights, what is the effect on total profit?
- If the directors close down only the manufacture of Standard paperweights, what is the effect on total profit?
- What is the best decision with regard to keeping profit as high as possible?
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