Page < 4 Question G4 Herbal Health is a newly set company that produces herbal tea. The company plans to launch a new product that called 'TOT'. After the announcement, the management quite concerns that the chance of new product in penetrating the existing market in the short term. The estimated sales for the year are 20,000 bags. Original proposal: The production of new teas will incur the following costs: Direct labor RM 3 per unit, Direct materials RM6 per bag, Variable overheads RM2 per bag, Fixed administrative costs RM130,000 and fixed production overheads RM120,000. Current selling price is RM25 per bag. Proposal 1: The production manager feels that if the production system is upgraded then total variable costs per bag could be reduced by RM2, however the upgrade would incur an additional fixed production overhead cost of RM50,000. Proposal 2: The managing director wants to reduce the wastage by installing a new equipment in the storage department. He calculates that both the costs of direct material and variable overheads per bag could be reduced to RM3 and RM1.5 simultaneously. The new equipment will most likely cost the company RM60,000. Required: Advice the management the best course of action should be taken. (Support your decision with all necessary relevant calculation) of-
Page < 4 Question G4 Herbal Health is a newly set company that produces herbal tea. The company plans to launch a new product that called 'TOT'. After the announcement, the management quite concerns that the chance of new product in penetrating the existing market in the short term. The estimated sales for the year are 20,000 bags. Original proposal: The production of new teas will incur the following costs: Direct labor RM 3 per unit, Direct materials RM6 per bag, Variable overheads RM2 per bag, Fixed administrative costs RM130,000 and fixed production overheads RM120,000. Current selling price is RM25 per bag. Proposal 1: The production manager feels that if the production system is upgraded then total variable costs per bag could be reduced by RM2, however the upgrade would incur an additional fixed production overhead cost of RM50,000. Proposal 2: The managing director wants to reduce the wastage by installing a new equipment in the storage department. He calculates that both the costs of direct material and variable overheads per bag could be reduced to RM3 and RM1.5 simultaneously. The new equipment will most likely cost the company RM60,000. Required: Advice the management the best course of action should be taken. (Support your decision with all necessary relevant calculation) of-
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question G4
Herbal Health is a newly set company that produces herbal tea. The company plans to launch a
new product that called 'TOT'. After the announcement, the management quite concerns that the
chance of new product in penetrating the existing market in the short term. The estimated sales for
the year are 20,000 bags.
Original proposal: The production of new teas will incur the following costs: Direct labor RM 3
per unit, Direct materials RM6 per bag, Variable overheads RM2 per bag, Fixed administrative
costs RM130,000 and fixed production overheads RM120,000. Current selling price is RM25 per
bag.
Proposal 1: The production manager feels that if the production system is upgraded then total
variable costs per bag could be reduced by RM2, however the upgrade would incur an additional
fixed production overhead cost of RM50,000.
Proposal 2: The managing director wants to reduce the wastage by installing a new equipment in
the storage department. He calculates that both the costs of direct material and variable overheads
per bag could be reduced to RM3 and RM1.5 simultaneously. The new equipment will most likely
cost the company RM60,000.
Required:
Advice the management the best course of action should be taken. (Support your decision with all
necessary relevant calculation)
of-
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