Answer to Question #252195 in Finance for Hastings Mambwe

Question

 

High-End Set

Economical Set

W/D Combo

Total

Sales

$4,700.000

$4,060,000

$880,000

$9,640,000

Labour

$(1,250,000)

$(1,015,000)

$(235,000)

$(2,500,000)

Materials

$(1,885,000)

$(1,220,000)

$(315,000)

$(3,420,000)

Direct Fixed Costs

$(325,000)

$(220,000)

$(250,000)

$(795,000)

Allocated Fixed costs

$(650,000)

$(650,000)

$(650,000)

$(1,950,000)

Net Income

$590,000

$955,000

$(570,000)

$975,000

 

You are to perform an analysis to determine whether to drop or keep the ash dryer combination product and present your findings, including the steps taken to make your determination. You are also asked to evaluate if the costing methodology is appropriate and if not, recommend the alternative methods

Answer 1

Solution:

A cost-benefit analysis is required to determine whether to keep the ash dryer combination product or not. We first determine all the costs required, then determine benefit derived, and finally, compare the total costs incurred with the total benefits derived.

From the cost-benefit analysis performed, it is obvious that the ash dryer combination is not sustainable or beneficial to the company due to the huge losses incurred. The company should, therefore, drop the ash dryer combination and concentrate on producing Economical set and High-end set which are more attractive to clients and hence profitable.

 

The best costing methodology to use is the standard costing method. A standard cost technique has the highest level of cost control, cost integrity, and financial stability. It measures daily inventory values and cost of sales against standard levels, hence allowing the company to manage its costs and maximize profits.