Reference no: EM132325865

Question

Divine Designs sells a range of jewellery cleaners and polishing cloths. The most popular jewellery polishing cloth with Divine Designs' customers is 'Bright Jewel' which is sold for $25 each. Owner-manager Lola Spring is considering a proposal to process "Bright Jewel" by sewing silk flowers in a corner and naming this polishing cloth "Flower Jewel". Divine Designs normally sells 6,000 Bright Jewel cloths per year. The cost of each cloth is $8 and variable selling costs are $1.50 per cloth.

If the Bright Jewel polishing cloth is processed further by sewing silk flowers in a corner, there will be additional variable processing costs of $3.00 per cloth and additional variable selling costs of $2.20 per cloth.

Lola estimates that the Flower Jewel cloths could be sold for $30 per cloth with estimates sales if 1,000 cloths in the first year. Annual sales of Bright Jewel are expected to fall to 5,500 cloths. Required:

1. On the basis of the information above, prepare an analysis in table form showing the relevant costs and revenues of selling only Bright Jewel cloths versus the alternative of selling both 1,000 Flower Jewel cloths and Bright Jewel cloths.

2. Verify your analysis by comparing the incremental revenues and incremental costs of processing with natural ingredients for Flower Jewel.