Xu Ltd currently produces and sells two types of pillows that are currently gaining market share. The two types of pillows are Latex and Feather. Below are the costs and sales details of the two types of pillows for 2019: Latex FeatherAnnual sales (in pairs) 12,000 8,000 Selling price £30 £30Variable costs per pair:Materials £12 £12 Labour-machining(£8/hr) £2 £2 -assembly(£7) £2.50 £2.50 -packing (£6/hr) £0.30 £0.30Variable overhead £0.20 £0.20 Annual total fixed costs are currently £150,000. For 2020 financial year, Xu Ltd intends to keep Latex pillows as it is but plans to improve Feather by using high quality materials. As a result, company has negotiated with another supplier and the new material cost for Feather pillows is expected to be £17 a pair, with the new selling price of £45 per pair. Also, Feather pillow’s Labour cost for machining will increase to £4. Also in 2020, the company intends to launch a new pillow, the Memory foam, a top of the range pillow with a selling price of £58.Materials will cost £30 a pair.Labour costs for machining will be £4 a pair, assembly will be £6.50 a pair and packing £0.30 a pair. Variable overheard will be £0.20 a pair. Demand for the pillows for 2020 will be: Latex 12,000 Feather 6,000 Memory foam 5,000 Fixed costs will increase by 3% next year. a) Calculate the annual net profit for the year ending 2019 b) Calculate the annual net profit for 2020 assuming the demand is met in full. c) If the maximum number of machine hours is limited to 7,200 in 2020, create a production plan to maximise net profit, showing the quantities of each type of pillow produced and calculate net profit. d) Identify and describe the type of decision that Xu Ltd’s contribution analysis is based on and suggest two ways that the company can improve the contributions of the pillows. e) Identify and briefly describe three types of decisions that contribution analysis can be based on.
Xu Ltd currently produces and sells two types of pillows that are currently gaining market share. The two types of pillows are Latex and Feather. Below are the costs and sales details of the two types of pillows for 2019:
Latex Feather
Annual sales (in pairs) 12,000 8,000
Selling price £30 £30
Variable costs per pair:
Materials £12 £12
Labour-machining(£8/hr) £2 £2
-assembly(£7) £2.50 £2.50
-packing (£6/hr) £0.30 £0.30
Variable overhead £0.20 £0.20
Annual total fixed costs are currently £150,000.
For 2020 financial year, Xu Ltd intends to keep Latex pillows as it is but plans to improve Feather by using high quality materials. As a result, company has negotiated with another supplier and the new material cost for Feather pillows is expected to be £17 a pair, with the new selling price of £45 per pair.
Also, Feather pillow’s Labour cost for machining will increase to £4.
Also in 2020, the company intends to launch a new pillow, the Memory foam, a top of the range pillow with a selling price of £58.
Materials will cost £30 a pair.
Labour costs for machining will be £4 a pair, assembly will be £6.50 a pair and packing £0.30 a pair.
Variable overheard will be £0.20 a pair. Demand for the pillows for 2020 will be:
Latex 12,000 Feather 6,000 Memory foam 5,000
Fixed costs will increase by 3% next year.
a) Calculate the annual net profit for the year ending 2019
b) Calculate the annual net profit for 2020 assuming the demand is met in full.
c) If the maximum number of machine hours is limited to 7,200 in 2020, create a production plan to maximise net profit, showing the quantities of each type of pillow produced and calculate net profit.
d) Identify and describe the type of decision that Xu Ltd’s contribution analysis is based on and suggest two ways that the company can improve the contributions of the pillows.
e) Identify and briefly describe three types of decisions that contribution analysis can be based on.
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