produces three products. The following information has been extracted from last year’s accounts:
N I M
Rs.000 Rs.000 Rs.000
Sales 650 500 320
Variable cost 340 330 220
Fixed cost Rs.410,000
In addition further research has indicated that the sales of product I are likely to be Rs.400,000 next year due to competitive pressures, and its variable costs Rs.300,000.The sales and costs of the other two products are expected to be the same next year. The fixed costs were shared out using a total absorption costing approach and are expected to be the same in the next year. The Managing Director calls for immediate withdrawal of product I from the product range. However, by dropping product I fixed costs would be reduced by Rs.25,000.
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