Insulation Ltd has been established to manufacture insulation material for use in houses. At present, one machine is installed for production of insulation material. A further similar machine can be purchased if required. The first customer is willing to place orders in three different sizes at the following selling prices:

The customer will enter into an initial contract of 30 days’ duration and will uplift completed packages on a daily basis from the premises of Insulation Ltd. The following assumptions have been made in respect of Insulation Ltd:

(a). In view of the competitive market the selling prices are not negotiable.

(b). Direct materials will cost £23.75 per package irrespective of the order size.

(c). The output of one machine will be 350 packages per shift.

(d). A maximum of three shifts will be available on a machine within one day. The depreciation charge for a machine will be £100 per day, irrespective of the number of shifts worked.

(e). Labour costs to operate a machine will be £100 for the first shift, £120 for the second shift and £160 for the third shift of the day. If labour is required for a shift, then the full shift must be paid for regardless of the number of packages produced.

(f). The total cost of supervising the employees for each of the first two shifts in any day will be £20 per machine. The supervision cost of the third shift will be £40 per machine.

(g). Other fixed overhead costs will be £280 per day if one machine is used. Buying and using an additional machine would result in a further £100 of fixed costs per day.

(h). Production and sales volume will be equal regardless of order size.

(i). The company does not expect to obtain other work during the term of the initial contract.

Required

Prepare a report for the production director of Insulation Ltd giving:

1. For each order size, details of the overall profitability per day and net profit per package.

2. An explanation of the differing amounts of profit per package.

Transcribed Image Text:

Order size Selling price per package 430 packages per day 880 packages per day 1,350 packages per day 25.20 25.00 24.80