QUESTION 15

Obonku Limited produces Single, Double, and King Size beds for sale to hotels in West Africa. Its manufacturing plant is located in Tema and currently producing at 100% capacity. Below are the annual output and sales of each product and the associated costs.

ProductSingle Double bed King Size bed

Units sold 5,000units 3,500units 4,000units

GH GH GH

Sales 2,500,0002,800,0003,800,000

Costs:

Material cost 750,0001,400,0001,520,000

Labour costs 600,0001,050,0001,200,000

Manufacturing Ohead 200,000 650,000 300,000

Administrative cost 200,000 100,000 200,000

Total cost1,750,0003,200,0003,220,000

Profit / Loss 750,000(400,000) 580,000

The Director of Obonku is of the view that the product, Double bed is not doing well and must not be produced any longer. The following additional information has been provided.

i. 40% of the labour cost for all bed type are fixed costs.

ii. 50% of the manufacturing overhead is variable costs for all products.

iii. 80% of the administrative cost is fixed.

Alom hotel limited situated at Elmina has requested for 80 units of each bed and they are ready to procure them at the current prices. Obonku Ltd can only produce more if they increase production capacity in the short term at an additional cost of GH80,000.

Assuming that costs and prices remain the same.

You are required to:

a) Advice whether the company should shut down the production of double beds. (10 marks)

b) Should the company accept the new order assuming double beds will still be produced? (10 marks)