Reference no: EM133112980
Question - Mr Jordan is concerned about the losses shown by the fixed-wing drones and wants a recommendation as to whether the line should be discontinued.
The following information is relevant to the fixed overhead figures above.
1. The two specialist machines used to produce each of the three drones currently have no resale value.
2. The company has no other use for the capacity now being used to produce fixed-wing drones.
3. If the fixed-wing drones were discontinued, both line supervisors responsible for its manufacture would no longer need to be employed by the company.
4. The marketing expense for each line of drones is exclusively for those drones.
5. Factory overheads are general and fixed common costs that are allocated based on sales.
Table 1 - Operating statement
|
Drones
|
|
Total
|
Fixed-wing
|
Fixed-wing hybrid
|
Multi-rotor
|
|
£
|
£
|
£
|
£
|
|
Sales
|
845,000
|
180,000
|
420,000
|
245,000
|
|
Less: variable expenses
|
354,000
|
93,000
|
160,000
|
101,000
|
|
Contribution
|
491,000
|
87,000
|
260,000
|
144,000
|
|
Less: fixed overheads
|
|
|
|
|
|
Marketing
|
102,000
|
18,000
|
58,000
|
26,000
|
|
Deprecation of equipment
|
116,000
|
36,000
|
48,000
|
32,000
|
|
Line supervisors' salaries
|
34,000
|
11,000
|
12,000
|
11,000
|
|
Factory overheads
|
169,000
|
36,000
|
84,000
|
49,000
|
|
Total fixed overheads
|
421,000
|
101,000
|
202,000
|
118,000
|
|
Net operating profit (loss)
|
Total 70,000
|
Total (14,000)
|
Total 58,000
|
Total 26,000
|
Required -
a) Using the information in Table 1, and your knowledge of relevant costs, calculate the increase/decrease in operating profit for the company if the fixed-wing drones were discontinued.
b) For each of the four fixed overheads, give a reason why you decided in (a) that the overhead is relevant or irrelevant.
c) Based on your analysis of relevant and non-relevant costs:
i. Amend the operating statement in Table 1 to provide the total profitability of the drones as well as the profitability of each drone.
ii. Explain the main reason for the change you propose in (c) (i) above.
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