A company makes a certain range of
products.
They are considering discontinuing the products
that make a loss.
Analyse the impact on the company if
they stop selling these products.
Answer:
£’s
Total profit: 6,270
Contribution:
Contribution =
Total revenue – Variable costs.
A 32,664
B 5,960
C 3,147
D 10,537
E 11,132
Total
contribution – Fixed
costs = profit (63,440 – 57,170
= 6,270)
For only products A and D:
Profit = Total contribution – total fixed costs
43,201 – 57,170
= (13,969)
A fall of
£20,239 from the total profit. (The difference between £6,270 and (13,969).
All make a
positive contribution, but if the three are discontinued, products A and D will
have to carry the total fixed costs.
Marginal costing gives information not available through more traditional costing approaches (1) – e.g. absorption costing (1)
But contribution analysis ignores factors such as market conditions and competitor actions (1)
Other factors need to be considered (1) – e.g. the five products cover a range of situations or tastes (1) (Give examples about the type of products in the question) (2)
So discontinuing may affect sales of other products (1)
Reduced product range allows competitors to step in (1)
Special order decisions
Click on the picture:
Special order question here.
Marginal costing gives information not available through more traditional costing approaches (1) – e.g. absorption costing (1)
But contribution analysis ignores factors such as market conditions and competitor actions (1)
Other factors need to be considered (1) – e.g. the five products cover a range of situations or tastes (1) (Give examples about the type of products in the question) (2)
So discontinuing may affect sales of other products (1)
Reduced product range allows competitors to step in (1)
Special order decisions
Click on the picture:
Special order question here.
