umbo Pty Ltd manufactures a number of products in its five departments. In the first department, car seats are manufactured. Currently, two products, namely a budget car seat and a standard car seat are being manufactured. Management have noted with concern the impact of the global pandemic Covid-19 on the sudden decline in the sales of the standard car seat. Regardless of attempts to cut the number of employees on the production line as well as a recent productivity drive aimed at higher productivity and less wastage of resources, the department is still operating at a loss.
Jumbo Pty Ltd
Jumbo Pty Ltd manufactures a number of products in its five departments. In the first department, car seats are manufactured. Currently, two products, namely a budget car seat and a standard car seat are being manufactured.
Management have noted with concern the impact of the global pandemic Covid-19 on the sudden decline in the sales of the standard car seat. Regardless of attempts to cut the number of employees on the production line as well as a recent productivity drive aimed at higher productivity and less wastage of resources, the department is still operating at a loss.
The following budget has been compiled at 60% of the available capacity, based on labour hours for the year ending 30 September 2020.
Budget car seat Standard car seat
Sales R 1358000 R1620000
Less expenses (R1281000) (R2004000)
Direct material R357000 R684000
Direct labour R 210000 R300000
Net income/(loss) R77000 (R384000)
Production and sales (units) R 7000 R6000
• Overheads are allocated to production based on direct labour hours.
• An amount of R1 387 200 in respect of fixed overheads is included in overheads.
• Organizational overheads relating to head office costs are allocated to departments. These
overheads amount to 30% of the fixed overhead figure stated above. The remainder of the fixed
overheads specifically relate to the first department.
• 60% of the fixed overheads of the first department are discretionary.
• All production line workers earn the same hourly rate.
• The demand for the budget car seat will not be affected if the manufacturing of the standard car seat
is discontinued
Advise the management of Jumbo Pty Ltd on the decision of whether the manufacture of the standard car seat should be discontinued or not, in the long term as well as the short to medium term. Motivate your reasoning in respect of cost items not taken into account.
Discuss any four possible solutions which the first department should take to solve the
problems it is currently facing
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