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Dear Sir, please help me to understand the following:
In the example, there are three products. It is estimated how much we would lose if one of them is excluded from production. Then, it is said that 5% of sales (sales of other two products) will be lost because of this ceasing. In calculations they don’t take Sales price, but deduct from it a Labour cost. But what is the reasoning for subtracting it?I think you are referring to a past exam question.
Please tell me the name of the question (and which exam) and then I will try and help you.I certainly don’t think they deducted the lost sales from the labour cost!!
This is December 2009 exam problem, Note (2) about 5% loss in Sales.STAY CLEAN.
I misread your original question 🙂
They have subtracted the labour from the sales for the lost 5% because they lose the revenue from them but they will save the labour cost if they are not making them. So rather than show the lost revenue and the saved labour separately (which you could do – no problem) the answer has just shown the net amount.
(They will also save materials as well if they are not producing the units, but this saving needs to be dealt with separately because of the change in the discount %)
Thank you, now I understand. But I can’t get the idea and logic of material discount table calculations in my kit. If it’s ok for you, could you explain how did we arrive at 88500?kits table -i can’t comprehend it, it’s just beyond my ability…
At the current prices, the total cost of materials in 1,010,000. This means that they are currently getting a discount of 5% and the 1,010,000 is after this discount.
Losing TD will save 60,000 at the current prices, and losing 5% of the others will save 17,500 + 30,000 = 47,500 at current prices.
So the new total cost of materials at the current prices will be 1,010,000 – 60,000 – 47,500 = 902,500.
However this is after a discount of 5% which means it is only 95% of the full price. So the full price is 902,500/95% = 950,000.
Since the full price is now less than 960,000, the discount will only be 3% and so the actual cost of materials will now be 97% x 950,000 = 921,500.
So the saving in materials cost = 1,010,000 – 921,500 = 88,500
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