fixed overheads are allocated to each product line on the basis of direct labour hou 644143

Montrose Glass Products Ltd manufactures three ranges of high quality paper weights – Basic, Standard and Deluxe. Its accountant has prepared a draft budget for Year 7:

 

		Basic £000s	Standard £000s	Deluxe £000s	Total £000s
Revenue	45		35	40	120
Material	15		10	10	35
Labour	20		15	5	40
Variable overhead	5		12	5	22
Fixed overhead	9		5	6	20
	49		42	26	117
Profit/(loss)	(4)		(7)	14	3

Fixed overheads are allocated to each product line on the basis of direct labour hours. The directors are concerned about the viability of the company and are currently considering the cessation of both Basic and Standard ranges, since both are apparently making losses.

Required

(a) If the directors close down only the manufacture of Basic paperweights, what is the effect on total profit?

(b) If the directors close down only the manufacture of Standard paperweights, what is the effect on total profit?

(c) What is the best decision with regard to keeping profit as high as possible?