Characteristics of both relevant costs and irrelevant costs

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Reference no: EM133502735

Question: Rocky Clothing Ltd manufactures two products (menswear and ladieswear) using the same production facilities and labour for each product. The company is facing a constraint of machine capacity and has a total of only 10,000 machine hours available. The capacity constraint cannot be lifted within the next year as there is a 12-month delivery and installation period on new machines. The selling price and cost per unit of the two products are as follows: Menswear Ladieswear $50 Selling Price $23 Direct Material 3 Direct Labour Variable Overhead Fixed Overhead 4 684 ? 18 14 10 Total cost 48 Profit per unit The fixed overhead is allocated to the products on the basis of direct labour hours. The total fixed overhead is $100,000. Menswear requires 1 hour of machine time per unit while ladieswear requires 2 hours per unit. Based on the current market situation, the maximum numbers of menswear and ladieswear which could be sold in the market are 8,000 and 5,000 respectively. 04

Required: (a) For the limited resources of 10,000 machine hours, determine the most profitable product mix (number of units of each product to be produced) AND the amount of profit earned based on your proposed product mix.

(b) Managers use the relevant costs concept in making business decisions. Briefly describe the characteristics of both relevant costs and irrelevant costs, and provide two examples of relevant costs.

Reference no: EM133502735

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