Q2. A company manufactures three products, X , Y and Z. The present net annual income from these is:

X

Y

Z

TOTAL

GH

GH

GH

GH

Sales

50,000

40,000

60,000

150,000

Variable costs

30,000

25,000

35,000

90,000

Contribution

20,000

15,000

25,000

60,000

Fixed costs

17,000

18,000

20,000

55,000

Profit / Loss

3,000

(3,000)

5,000

5,000

The company is concerned about its poor profit performance and it is considering whether or not to cease selling product Y. It is felt that selling prices cannot be raised or lowered without adversely affecting net income. GH5,000 of the fixed cost of Y are direct fixed costs which would be saved if production ceased (ie there are some attributable fixed costs). All other fixed costs, it is considered, would remain the same.

a) Should the company cease selling the product Y? 7 marks

b) Suppose, however, it were possible to use the resources realized by stopping production of Y and switch to producing a new product, W, which would sell forGH50,000 and incur variable costs of GH30,000 and extra direct fixed costs of GH6,000. Should the company switch to the production of W? 7 marks