Business Studies – 4.4.1 Identify and classify costs | e-Consult
4.4.1 Identify and classify costs (1 questions)
Calculate the new cost of materials:
Reduction in material cost = 20% of £4,000 = 0.20 x £4,000 = £800
New cost of materials = Current cost of materials - Reduction in material cost = £4,000 - £800 = £3,200
How this information can be used:
The company currently makes a profit of £10,000. If the new production method reduces the cost of materials to £3,200 per year, the new total cost of production will be lower. To determine whether to continue or stop production, the company needs to compare the new profit with the current profit.
Current Total Cost:
Current Material Cost: £4,000
Current Labour Cost: £2,000 (This is assumed to be fixed for this question)
Current Total Cost = £4,000 + £2,000 = £6,000
New Total Cost:
New Material Cost: £3,200
New Total Cost = £3,200 + £2,000 = £5,200
New Profit:
New Profit = New Total Revenue - New Total Cost = £10,000 - £5,200 = £4,800
The new profit is £4,800, which is lower than the current profit of £10,000. Therefore, based solely on this cost data, the company should consider stopping production of the product. However, other factors such as market demand, brand reputation, and potential future costs should also be considered before making a final decision. A full cost-benefit analysis is recommended.