Blue Navy Limited produces three products. Recently, one of its suppliers has suffered from shortages of raw
Question:
Blue Navy Limited produces three products. Recently, one of its suppliers has suffered from shortages of raw material. The details are as follows: -
Ivory | Mink | Ambergris | |
£ per unit | £ per unit | £ per unit | |
Selling Price | 4.00 | 4.50 | 3.40 |
Direct Material | 0.50 | 3.10 | 1.50 |
Direct Material 2 | 2.10 | 0.35 | 1.40 |
Variable Overheads | 0.30 | 0.70 | 0.80 |
Allocation of Shared Fixed Costs | 0.30 | 0.60 | 0.20 |
Profit | 0.80 | -0.25 | -0.50 |
Estimated Sales Volume in Units (Demand) | 100000 | 250000 | 300000 |
Required: -
a. Advice the managers which products should be manufactured, and which should be discontinued.
b. You have now learnt that £0.50 of Minks's fixed cost is a separable fixed cost, will this alter your recommendation?
c. Assume the business's fixed costs are all shared, not separable, and Direct Material 2 costs £0.07 per ml. You have been advised that due to a shortage of Direct Material 2 the
business can only secure 1,300,000 ml from its suppliers in the current year. Advise the business on a sales mix that will maximise its contribution and calculate this contribution. Numerically justify your recommended sales mix.
d. Assume the fixed costs are separable. The business plans to launch a new advertising campaign costing £10,000. Calculate its expected profit for the upcoming year, the breakeven volume and the margin of safety.
e. The advertisement agency has offered the business an option to pay a commission of £0.15 for each unit of sales, as opposed to a fixed annual fee of £10,000. If the business
accepts this offer, what will its expected profit, break-even volume and margin of safety be for the upcoming period?