REKP675 ASSIGNMENT PQR LTD QUESTION TOPIC: RELEVANT COST Dropping products _____________________________________________________________________________________ PQR Ltd manufactures three products P, Q, and R. A comparative statement showing the present net monthly income of the three products are given below: Product P (R) Product Q (R) Product R (R) Total (R) Sales 250 000 300 000 350 000 900 000 - Variable costs 150 000 200 000 160 000 510 000 = Contribution margin R100 000 R100 000 R190 000 390 000 - Fixed cost 125 000 150 000 140 000 415 000 = Profit/(Loss) (25 000) (R50 000) R50 000 (25 000) Direct labour usage by each of the products is as follows: Product P 5 000 hours Product Q 4 000 hours Product R 6 000 hours Management of PQR Ltd is concerned about these products poor performance and is considering which products can be dropped. On average 40 % of the fixed cost in each case is avoidable. Required: (1) Advise PQR Ltd regarding the dropping of products. (2) A new product X can be produced at a variable unit cost of R70, a sales commission of R20 and a sales price of R150 per unit for 4 000 units. The direct labour hours needed for the 4 000 units are 5 000 hours. The fixed cost will amount to R50 000 avoidable and the R75 000 unavoidable cost for Product P. Should product X be added in the place of Product P, as both have the same direct labour hours needed?

REKP675 ASSIGNMENT - PQR LTD - QUESTION TOPIC: RELEVANT COST - Dropping products PQR Ltd manufactures three products P, Q, and R. A comparative statement showing the present net monthly income of the three products are given below: Product P Product Q (R) Product R (R) Total (R) (R) Sales - Variable costs = Contribution margin - Fixed cost = Profit/(Loss) 250 000 150 000 R100 000 125 000 (25 000) 300 000 200 000 R100 000 150 000 (R50 000) 350 000 160 000 R190 000 140 000 R50 000 900 000 510 000 390 000 415 000 (25000) Direct labour usage by each of the products is as follows: Product P Product Q Product R 5 000 hours 4000 hours 000 hours 6 Management of PQR Ltd is concerned about these products' poor performance and is considering which products can be dropped. On average 40% of the fixed cost in each case is avoidable. Required: (1) Advise PQR Ltd regarding the dropping of products. (2) A new product X can be produced at a variable unit cost of R70, a sales commission of R20 and a sales price of R150 per unit for 4 000 units. The direct labour hours needed for the 4 000 units are 5 000 hours. The fixed cost will amount to R50 000 avoidable and the R75 000 unavoidable cost for Product P. Should product X be added in the place of Product P, as both have the same direct labour hours needed