Question
Wings Maju sells 3 different sets of child meals in its restaurants: M1, M2, and M3. Changes in product lines do not affect demand of
Wings Maju sells 3 different sets of child meals in its restaurants: M1, M2, and M3. Changes in product lines do not affect demand of other products. Results of July are below:
| M1 | M2 | M3 | Total |
Units sold | 4,000 | 2,500 | 2,600 | 9,100 |
Revenue | $32,000 | $30,000 | $26,000 | $88,000 |
Variable departmental costs | 19,200 | 16,500 | 10,400 | 46,100 |
Direct fixed costs | 5,000 | 7,000 | 4,000 | 16,000 |
Allocated fixed costs | 6,500 | 8,500 | 7,500 | 22,500 |
Net income | $1,300 | ($2,000) | $4,100 | $3,400 |
Seventy percent of the allocated fixed costs are unavoidable.
Required:
a. | Prepare an incremental analysis to determine if M2 should be discontinued. |
| (15 marks) |
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b. | Briefly explain costs allocation death spiral effect. |
| (5 marks) |
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c. | Define opportunity costs and give an example / situation on when opportunity costs exist. |
| (5 marks)
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