A processing company, Timao Co. Ltd., is extremely busy.It has increased its output and sales from 12,900

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Question:

A processing company, Timao Co. Ltd., is extremely busy. It has increased its output and sales from 12,900 kg in 1st quarter of the year to 17,300 kg in the 2nd quarter. Although demand is still rising, it cannot increase its output more than an additional 5% from its existing labour force, which is now at its maximum.

Data for its four products in 2nd quarter were:

Product Product Product Product

P Q R S

Output (kg) 4560 6960 3480 2300

Selling price (Sh. Per kg) 162 116.40 99.20 136.80

Costs (Sh. Per kg)

Direct labour @ Sh.60 per hour) 19.60 13.00 9.90 17.00

Direct materials 65.20 49.00 41.00 54.20

Direct packaging 8.40 7.40 5.60 7.00

Fixed overhead

(Absorbed on basis of direct

labour cost) 39.20 26.00 19.80 34.00

132.40 95.40 76.30 112.20

The Kagocho Company has offered to supply 2000 kg of product Q at a delivered price of 90% of Timao's Co. Ltd. Selling price. Timao Co. Ltd., will then be able to produce extra of product P instead of product Q to the plant's total capacity.

Required:

a) State with supporting calculations, whether Timao Co. Ltd should accept the Kagocho Company's offer.