A chemical company has a contract to supply annually 3600 tonnes of product A at 24 a

Question:

A chemical company has a contract to supply annually 3600 tonnes of product A at £24 a tonne and 4000 tonnes of product B at £14.50 a tonne. The basic components for these products are obtained from a joint initial distillation process. From this joint distillation a residue is produced which is processed to yield 380 tonnes of by-product Z. By-product Z is sold locally at £5 a tonne and the net income is credited to the joint distillation process.
The budget for the year ending 30 June includes the following data:

Since the budget was compiled it has been decided that an extensive five-week overhaul of the joint distillation plant will be necessary during the year. This will cost an additional £17000 in repair costs and reduce all production in the year by 10 per cent. Supplies of the products can be imported to meet the contract commitment at a cost of £25 a tonne for A and £15 a tonne for B. Experiments have also shown that the joint distillation plant operations could be changed during the year such that either:
(i) The output of distillate for product A would increase by 200 tonnes with a corresponding reduction in product B distillate. This change would increase the joint distillation variable costs for the whole of that operation by 2 per cent, or
(ii) The residue for by-product Z could be mixed with distillate for products A and B proportionate to the present output of these products. By intensifying the subsequent processing for products A and B acceptable quality could be obtained. The intensified operation would increase product A and B separable fixed costs by 5 per cent and increase the evaporation loss for the whole operation to 11 per cent and 21 per cent respectively.
You are required to:
(a) Calculate on the basis of the original budget:
(i) The unit costs of products A and B; and
(ii) The total profit for the year;
(b) Calculate the change in the unit costs of products A and B based on the reduced production;
(c) Calculate the profit for the year if the shortfall of production is made up by imported products;
(d) Advise management whether either of the alternative distillation operations would improve the profitability calculated under (c) and whether you recommend the use of either.