To what extent is Mutale justified in seeking a reappraisal of the situation. (25 marks)

Given:

• Factory overheads are allocated at 100% of direct labour cost.
• Fixed factory overheads and selling/admin expenses are provided.

Product A:

• Labour: K11,000
• Factory Overheads: K11,000
• Fixed Factory Overheads: K3,000
• Variable Factory Overheads: $11,000 - 3,000 = 8,000$
• Selling/Admin Expenses: K20,000
• Fixed Selling/Admin Expenses: K15,000
• Variable Selling/Admin Expenses: $20,000 - 15,000 = 5,000$

Product B:

• Labour: K4,000
• Factory Overheads: K4,000
• Fixed Factory Overheads: K1,000
• Variable Factory Overheads: $4,000 - 1,000 = 3,000$
• Selling/Admin Expenses: K8,000
• Fixed Selling/Admin Expenses: K6,000
• Variable Selling/Admin Expenses: $8,000 - 6,000 = 2,000$

Product C:

• Labour: K5,000
• Factory Overheads: K5,000
• Fixed Factory Overheads: K1,000
• Variable Factory Overheads: $5,000 - 1,000 = 4,000$
• Selling/Admin Expenses: K7,000
• Fixed Selling/Admin Expenses: K4,000
• Variable Selling/Admin Expenses: $7,000 - 4,000 = 3,000$

Product A:

• Gross Margin: K28,000
• Total Variable Costs: $11,000 + 8,000 + 5,000 = 24,000$
• Contribution Margin: $28,000 - 24,000 = 4,000$

Product B:

• Gross Margin: K5,000
• Total Variable Costs: $4,000 + 3,000 + 2,000 = 9,000$
• Contribution Margin: $5,000 - 9,000 = -4,000$

Product C:

• Gross Margin: K12,000
• Total Variable Costs: $5,000 + 4,000 + 3,000 = 12,000$
• Contribution Margin: $12,000 - 12,000 = 0$

• Product A has a positive contribution margin of K4,000.
• Product B has a negative contribution margin of K-4,000, indicating it is not covering its variable costs.
• Product C breaks even with a contribution margin of K0.

Conclusion:

Mutale is justified in seeking a reappraisal, especially for Product B, which is not contributing positively to covering fixed costs. Eliminating or restructuring Product B could improve overall profitability. A detailed analysis of fixed costs and potential restructuring of Product B is recommended.