Bishop & Co. manufactures vinyl pond lining for the water-garden industry. The company buys vinyl beads by
Question:
Bishop & Co. manufactures vinyl pond lining for the water-garden industry. The company buys vinyl beads by the tonne and heats and rolls them into large sheets which are then cut to the required sizes. One tonne of beads produces 10,000 square metres of liner. Bishop & Co. is uncertain of demand for next year and decides to produce a flexible budget covering five activity levels from 400,000 square metres to 600,000 square metres in steps of 50,000 square metres. The vinyl beads cost £800/tonne for purchases of up to and including 50 tonnes per year. Bishop & Co.s supplier offers it the following bulk-purchase incentive. For annual purchases exceeding 50 tonnes, the cost of every tonne in addition to the first 50 is £750. The direct labour cost is made up of an annual lump sum of basic pay plus a volume-related bonus operative on all production output. The present annual capacity of the manufacturing plant is 450,000 square metres. For production above this, a new machine will have to be purchased at a cost of £500,000. (No additional labour will be necessary to operate this highly automated machinery.) Bishop & Co.s policy on depreciation is to write off machinery in equal instalments over 10 years, assuming a zero residual value. The cost of insurance cover is a fixed amount up to a production level of 500,000 square metres. Beyond that, there is an additional cost per unit. Bishop & Co. is currently one of the market leaders (in terms of sales volume) in the vinyl pond liner market although it is very competitive. Bishop & Co. sets its selling price per square metre on a cost-plus basis by adding a 300% mark-up to the total production cost. This covers marketing and administration expenses and leaves a little left over for profit.
Tasks: 1. Complete the following production department budget for next year:
2. If demand were to exceed 500,000 square metres and the new machinery was purchased, what effect might this have on Bishops overall performance? What advice would you give regarding the purchase of the new machinery?
Transcribed Image Text:
000 sq. m 550 600 400 450 £ 500 £ Vinyl beads Direct labour Electricity Depreciation 47,500 32,000 80,000 8,000 22,000 90,000 34,000 11,250 139,000 331,750 Insurance Other production costs Total 139,000 292,000
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1 Production budget 000 sqm 400 450 500 550 600 Vinyl beads 32000 36000 40000 43750 47500 Direct lab...View the full answer
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