Strongarm Ltd makes three products and is reviewing the profitability of its product line. You are

given the following budgeted data about the firm for the coming year.

The company is concerned about the loss on product A. It is considering ceasing production of it

and switching the spare capacity of 100000 units to product C.

You are told the following.

i. All production is sold

ii. 25% of the labor cost for each product is fixed in nature

iii. Fixed administration overhead of $900000 in total has been apportioned to

each product on the basis of units sold and is included in the overhead costs

above. All other cost are variable in nature

iv. Ceasing production of Product A would eliminate the fixed labor charge

associated with it and one sixth of the fixed administration overhead

apportioned to product A

v. Increasing the production of product C by 100000 units would mean that

the fixed labor cost associated with product C would double, the variable

labor cost would rise by 20% and its selling price would have to be

decreased by $1.50 in order to achieve the increased sales

Product A Product B Product C

Sales (in units) 100000 120000 80000

$ $ $

Revenue 1500000 1400000 880000

Costs:

Material 500000 480000 240000

Labor 400000 320000 160000

Overhead 650000 600000 360000

1550000 1400000 760000

Profit/(loss) (50000) 40000 120000

Required

a. Prepare a marginal cost statement for a unit of each product on the basis of:

i. the original budget

ii. if product A is deleted

b. Prepare a statement showing the total contribution and profit for each product group on

the basis of:

i. the original budget

ii. if product A is deleted

c. Using your results from (a) and (b) advise whether product A should be deleted from the product range giving reasons for your decision