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Sir its from a bpp kit question,
No.34 .. Its about taking a decision of ceasing to produce Tumble dryer now or 12 months later.If we cease to produce TD we will be saving material costs amounting 17500+30000+60000=107500$ ..but in the solution they haven’t take account of this,instead they have calculated lost discount amounting 19000$ which i cant understand.. Pls help me sir.what amount should i add in the table of relevant costs if i choose to cease producing TD ??(this a repeatition of my previous question)There are two separate things here.
Firstly they will certainly save on materials due to the lost sales, however they will also lose revenue and will also save on material.
So rather than look at each of them separately it is more sensible just to look at the lost contribution.The second thing though is that the lost contributions are calculated using the current cost per unit of material.
Because in total they will be buying less material they will be having to pay more per unit for the material they do buy. It is because they will be buying less material in total than before and so will not be getting the same discount as before. The lost contributions are based on the current price of material and this is why the lower discount is taken account of separately.
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