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Dear Mr. John Moffat,
I want to ask you about the answer of example 1 of chapter 9, can you please explain why have you written ‘Lost contibution from Rooks’ because in question, it is a positive figure because I did not understand this part……
It is because if you stop producing Rooks then you lose the contribution that is currently being made from them.
But sir, if we are still making loss of (10,000), should not we cease production of Rooks in part a of the question?
I don’t know why you say that we are still making a loss!
If we stop producing Rooks (in part (a)) then we lose the sales revenue (40,000) but we save the variable cost (25,000) which means we would lose 15,000 that we are already earning (i.e. the contribution).
With regard to the fixed costs, the questions says that we would save 5,000 of the fixed costs if we stopped Rooks.
So……if we stop Rooks we lose the 15,000 contribution that we are currently earning, we save 5,000 (fixed costs) that we are currently paying. So by stopping we will lose 10,000 from what we are currently earning – i.e. our total profit will be 10,000 less than it currently is. As a result, it is not sensible to stop making Rooks.
Thank you so very much Professor Moffat, now I totally understand the logic in the answer. Peace be upon you!
Is it possible to have an audio copy of the lecture for short term decision making sent to me, I feel i would really benefit from this. thanks
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