QUESTION ONE (a) The Modern Motorcycle Company manufactures three types of motorcycles, a street motorcycle, an adventure motorcycle and a cruiser motorcycle. Management is concerned about the continued losses experienced by the cruiser motorcycle and would like a recommendation as to whether or not this product line should be discontinued. Data on sales and expenses for the past quarter are as follows: Total Street Adventure Cruiser 600,000 180,000 240,000 54,000 300,000 120,000 120,000 66,000 360,000 126,000 180,000 54,000 Sales Less variable manufacturing and selling expenses Contribution margin Less fixed expenses: Advertising*, traceable Depreciation of special equipment Salaries of product-line managers Common allocated costs** Total fixed expenses Operating profit (loss) 60,000 46,000 70,000 120,000 296,000 64,000 20,000 12,000 24,000 36,000 92,000 34,000 28,000 12,000 18,000 16,000 26,000 20,000 60,000 24,000 132,000 72,000 48,000 18,000 *The company organizes a specific advertising campaign for each product. **Allocated on the basis of sales. The special equipment used to produce the cruiser motorcycle has no resale value and cannot be used for other purposes. Required: Should the production and sale of the cruiser motorcycle be discontinued? Justify your answer by showing all the relevant computations. (25 Marks) (b) J&A Speakers produces and sells a single product, a Mini-Speaker Bluetooth. Annual production capacity is 400,000 machine hours. Annual demand for speakers is 320,000 speakers. The selling price is expected to remain at 48 per speaker. Cost data for producing and selling speakers are as follows: CONTINUED.............. Variable costs (per unit) Direct materials, labour and overhead Selling costs Fixed costs (per year) Fixed production costs Fixed selling costs 11.6 4 140,000 80,000 J&A Speakers has 4,000 speakers in inventory with manufacturing defects. The company has two choices: 1. Sell these lower quality speakers through the normal distribution channels at a reduced price Or 2. Scrap them at a net cost of zero. The sales of these lower quality speakers are not expected to affect regular sales. Required Determine and justify the minimum price per speaker that would have to be received in order to make it worthwhile selling the lower quality speakers rather than scrapping them. (10 Marks) (c) The Milcow Company is a dairy farm that processes raw milk into a number of joint products: milk, cheese, butter. Joint processing costs up to the split-off point amount to 350,000 per quarter. The company allocates these costs to the joint products on the basis of their total sales value at the split-off point. Unit selling prices and total output at the split-off point are as follows: Quarterly selling Product price Milk 32 per kilo Cheese 16 per kilo Butter 50 per litre Output 30,000 kilos 40,000 kilos 8,000 litres Each product can be processed further after the split-off point. Mr. Shoaib, the production manager, is concerned about the profitability of processing further each of the three products. The management accountant estimates that additional processing will not require any special facility and provides an estimate of the additional processing costs (per quarter) and unit selling prices after further processing: Product Milk Cheese Butter Additional processing Selling costs price 246,000 40 per kilo 360,000 26 per kilo 128,000 64 per kilo CONTINUED............. Required: Suggest to Mr Shoaib, on the basis of relevant computations, which product or products should be sold at the split-off point and which product or products should be processed further by the Milcow Company? (25 Marks) [TOTAL: 60 MARKS]