Temple Limited has been offered two new contracts, the details of which are as follows:The fixed overhead has been apportioned on the basis of direct labour cost. Temple is a one-product firm. Its budgeted cost per unit for its normal work for the year to 31 December 2020 is summarised below.

The company would only have the capacity to accept one of the new contracts. Unfortunately, materials suitable for use in all of its work are in short supply and the company has estimated that only 200,000 kilos would be available during the year to December 2020. Even more worrying is the shortage of skilled labour, only 100,000 direct labour hours are expected to be available during the year. The good news is that there may be an upturn in the market for its normal contract work.

Required:
Calculate
(a) The contribution per unit of each limiting factor for
(i) The company’s normal work
(ii) Contract 1
(iii) Contract 2.
(b) The company’s maximum contribution for the year to 31 December 2020, assuming that it accepts either Contract 1 or Contract 2.

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Contract Contract price Direct materials Direct labour Variable overhead Fixed overhead Profit Direct materials required (kilos) Direct labour hours required (1) £000 1 000 300 300 100 100 800 200 50 000 10 000 (2) £000 2 100 600 750 250 200 1 800 300 100 000 25 000