[zahidkhan2]

Hi John,

I was just working through this question. I have had a look at the explanation above but I am a bit confused as to why they exclude material cost from the lost contribution working?

I would of thought this would of been a separate working.

Many thanks if you could help me out!

ANSWER FROM DEC 2009 F5

a) The relevant costs of the decision to cease the manufacture of the TD are needed:
Cost or Revenue Working reference Amount ($)
Lost revenue Note 1 (96,000)
Saved labour cost Note 2 48,000
Lost contribution from other products Note 3 (118,500)
Redundancy and recruitment costs Note 4 (3,700)
Supplier payments saved Note 5 88,500
Sublet income 12,000
Supervisor Note 6 0
––––––––
Net cash flow (69,700)
––––––––
Conclusion: It is not worthwhile ceasing to produce the TD now.
Note 1: All sales of the TD will be lost for the next 12 months, this will lose revenue of 1,200 units x $80 = $96,000
Note 2: All normal labour costs will be saved at 1,200 units x $40 = $48,000
Note 3: Related product sales will be lost.
This will cost the business 5% x ((5,000u x $150) + (6,000u x $270)) = $118,500 in contribution (material costs
are dealt with separately below)
Note 4: If TD is ceased now, then:
Redundancy cost ($6,000)
Retraining saved $3,500
Recruitment cost ($1,200)
––––––––
Total cost ($3,700)
Note 5. Supplier payments:
DW ($) WM ($) TD ($) Net cost Discount Gross cost
($) level ($)
Current buying cost 350,000 600,000 60,000 1,010,000 5% 1,063,158
Loss of TD (60,000) (60,000) 5% (63,158)
Loss of related sales at cost (17,500) (30,000) (47,500) 5% (50,000)
New buying cost 921,500 3% 950,000
Difference in net cost 88,500
Note 6: There will be no saving or cost here as the supervisor will continue to be fully employed.
An alternative approach is possible to the above problem:
Cash flow Ref Amount ($)
Lost contribution – TD Note 7 12,000
Lost contribution – other products Note 8 (71,000)
Redundancy and recruitment Note 4 above (3,700)
Lost discount Note 9 (19,000)
Sublet income 12,000
Supervisor Note 6 above 0
––––––––
Net cash flow (69,700)
––––––––
Note 7: There will be a saving on the contribution lost on the TD of 1,200 units x $10 per unit = –$12,000
Note 8: The loss of sales of other products will cost a lost contribution of 5% ((5,000 x $80) + (6,000 x $170)) = $71,000
Note 9
DW WM TD Total (net) Discount Total gross
Current buying cost 350,000 600,000 60,000 1,010,000 5% 1,063,158
Saved cost (17,500 (30,000) (60,000)
New buying cost 332,500 (570,000) 0 902,500 5% 950,000
921,500 3% 950,000
Lost discount (19,000)
(b) Complementary pricing
Since the washing machine and the tumble dryer are products that tend to be used together, Stay Clean could link their sales
with a complementary price. For example they could offer customers a discount on the second product bought, so if they buy
(say) a TD for $80 then they can get a WM for (say) $320. Overall then Stay Clean make a positive contribution of $130
(320 + 80 – 180 – 90).
15

[zahidkhan2]

Thanks Sue ! You have cleared up my problems 🙂

[zahidkhan2]

Hi Sue ,

Thank you for your reply , I was just wondering if for example they wrote off a loan interest to a customer and they received interest you would net those two off together wont you

[zahidkhan2]

Hi thank you for your reply .I understand so it can only be either carried forward fully or back fully not both.

Thank you very much your answer has really cleared up my misunderstanding!

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