Reference no: EM132617068

Trans Ltd. manufactures three products, X, Y and Z. The present net annual income from each  item is as follows:

                                        X                       Y                       Z                       Total

Sales                      Rs.50,000        Rs.40,000        Rs.60,000          Rs.150,000
Variable Costs             30,000              25,000          35,000               90,000
Contribution margin       20,000               15,000           25,000            60,000
Fixed Costs                 7,000                  18,000            20,000           55,000
Profit (Loss)              Rs. 3,000              Rs.( 3,000)       Rs.5,000        Rs.5,000

Trans Ltd. is concerned about its poor profit performance, and is considering whether or not to cease  selling Product Y. It is felt that selling prices cannot be increased or lowered without adversely affecting net income. Rs.8, 000 of the fixed costs of Product Y is direct fixed costs which would be  saved if production ceased. All other fixed costs will remain the same.

Required:

Problem a. Advise Trans Ltd. whether or not to cease production of Product Y. Assume that the total assets  would be unaffected by the decision and the resources made available by dropping Product Y  would remain idle. Show your calculation.

Problem b. Suppose, however, it were possible to use the resources realized by stopping production of  Product Y, and switch to produce a new item, Product S, which would sell for Rs.50,000 and  incur variable costs of Rs.30,000 and extra fixed costs of Rs.6,000. What will the new decision  be? Show your calculations.