Xu Ltd currently produces and sells two types of pillows that are currently gaining market share. The two types of pillows are Latex and Feather. Below are the costs and sales details of the two types of pillows for 2019: Annual sales (in pairs) Latex 12,000 Feather 8,000 Selling price £30 £30 Variable costs per pair: Materials £12 £12 Labour-machining (£8/hr) £2 £2 -assembly (£7/hr) £2.50 £2.50 -packing (£6/hr) £0.30 £0.30 Variable overheads £0.20 £0.20 Annual total fixed costs are currently £150,000. For 2020 financial year, Xu Ltd intends to keep Latex pillows as it is but plans to improve Feather by using high quality materials. As a result, company has negotiated with another supplier and the new material cost for Feather pillows is expected to be £17 a pair, with the new selling price of £45 per pair. Also, Feather pillow's Labour cost for machining will increase to £4. Also in 2020, the company intends to launch a new pillow, the Memory foam, a top of the range pillow with a selling price of £58. Materials will cost £30 a pair. Labour costs for machining will be £4 a pair, assembly will be £6.50 a pair and packing £0.30 a pair. Variable overheard will be £0.20 a pair. Demand for the pillows for 2020 will be: Fixed costs will increase by 3% next year. Required: Latex 12.000 Feather 6,000 Memory foam 5,000 d) Identify and describe the type of decision that Xu Ltd's contribution analysis is based on and suggest two ways that the company can improve the contributions of the pillows. e) Identify and briefly describe three types of decisions that contribution analysis can be based on.
Xu Ltd currently produces and sells two types of pillows that are currently gaining market
share. The two types of pillows are Latex and Feather. Below are the costs and sales
details of the two types of pillows for 2019:
Latex Feather
Annual sales (in pairs) 12,000 8,000
Selling price £30 £30
Variable costs per pair:
Materials £12 £12
Labour-machining (£8/hr) £2 £2
-assembly (£7/hr) £2.50 £2.50
-packing (£6/hr) £0.30 £0.30
Variable
Annual total fixed costs are currently £150,000.
For 2020 financial year, Xu Ltd intends to keep Latex pillows as it is but plans to improve
Feather by using high quality materials. As a result, company has negotiated with
another supplier and the new material cost for Feather pillows is expected to be £17 a
pair, with the new selling price of £45 per pair.
Also, Feather pillow’s Labour cost for machining will increase to £4.
Also in 2020, the company intends to launch a new pillow, the Memory foam, a top of
the range pillow with a selling price of £58.
Materials will cost £30 a pair.
Labour costs for machining will be £4 a pair, assembly will be £6.50 a pair and packing
£0.30 a pair.
Variable overheard will be £0.20 a pair.
Demand for the pillows for 2020 will be:
Latex Feather Memory foam
12,000 6,000 5,000
Fixed costs will increase by 3% next year.
Required:
d) Identify and describe the type of decision that Xu Ltd’s contribution analysis is
based on and suggest two ways that the company can improve the contributions
of the pillows.
e) Identify and briefly describe three types of decisions that contribution analysis can
be based on.
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