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A 4 tlustration 16. (Optimum Mix) Zudmakes a range of five products to which the following standards apply: PER UNIT D E 80 90 Sales price 70 60 50 12 21 Direct materials 17 10 9 gh 32 The 28 Direct Wages lony 16 Ishs 20 Tots 24 14 16 Vanable production overheads 8 10 12 8 Variable selling and distribution overheads Sofer 5 6 7 8. Fixed overheads 5 7 6 42 86 51 66 69 The direct labour wage rate is 24 per hour. Fixed overheads have been allocation the basis of direct labour hours. The company has commitments to produce a minimum of 400 units of each product per month direct hours cannot exceed 13,000 per month due to restriction of space. The Board is now considering an offer of a new three-year contract to produce an additional 400 units of product B per month at a selling price of 58 per unit. The contract would involve an outlay of 51,00,000 on the lease of additional factory premises and purchase of new plant and equipment. There would be residual value at the end of the contract. Variable production costs would be in accordance with existing standards, variable selling and distribution costs would be one-half of the existing rate and cash outflows on fixed costs would be 520,000 per annum. There would be no change to existing production arrangements. An outside supplier has offered to supply 400 units of product B per month at a price of 848 per unit. If pur-chased externally cash flows on additional fixed costs will be * 25,000 per annum. Required: Genommendations are by dictions, to show hou direct en ons in the thington should be used in order to mais profils show the butted toding results on the base of your recommendationin (5) Guestos to now whether or not the proped contact for products shotoboosoles whether it should be pached entendly a mantectures in the new periods. The comments Coto 10% the present role of an annuty of 31 for three years of 10% is ongetowolone production arrangements. An outside supplier has 248 per unit. If purchased externally cash flows on additional fixed costs will Required: (a) Give recommendations, supported by calculations, to show how direct labour hours in the existing factory should be utilised in order to maximize profits. [b] Show the budgeted trading results on the basis of your recommendations in (a) id Give calculations to show whether or not the proposed contract for product B should be accepted and, if so, whether it should be purchased externally or manufactures in the new premises. The company's cost of capital is 10% (the present value of an annuity of 1 for three years at 10% is 52.49). Ignore taxation and infiation E 90.00 21.00 32.00 Solution: A. Statement showing contribution per labour hour and determination of priority for profitability D A B i) Selling price 80.00 50.00 60.00 70.00 ii) Variable cost a. Direct material 9.00 10.00 17.00 12.00 b. Labour 16.00 20.00 24.00 28.00 c. Variable overheads 8.00 10.00 12.00 14.00 d. Variable selling & dis. Overheads 5.00 6.00 7.00 8.00 38.00 46.00 60.00 62.00 i) Contribution 12.00 14.00 10.00 18.00 iv) Contribution per labour hour 3.00 2.80 1.66 2.57 v) Priority | II IV 16.00 9.00 78.00 12.00 1.50 V B. Statement showing optimum mix under given conditions and computation of profit at that mix. A B D Total E 4,800.00 4,800.00 4,800.00 4,800.00 Minimum no. of units Units in remain hours (w) No. of units 4,800.00 3,000.00 7,800.00 4,800.00 4,800.00 4,800.00 14.00 4,800.00 10.00 12.00 18.00 93,600.00 67,200.00 48,000.00 86,400.00 Contribution per Unit ) Total contribution (5) Fixed cost (156000 hoursxl) () Profit ) 12.00 57,600.00 352,800.00 156,000.00 196,800.00 Working notes: Available hours 156,000.00 hrs. 144,000.00 hrs. Hours utilised for minimum {(4+5+6+7+8)x4800} 12,000.00 hrs. Remaining hours Therefore units of a to be produced (12000/4) 3000 units A 4 tlustration 16. (Optimum Mix) Zudmakes a range of five products to which the following standards apply: PER UNIT D E 80 90 Sales price 70 60 50 12 21 Direct materials 17 10 9 gh 32 The 28 Direct Wages lony 16 Ishs 20 Tots 24 14 16 Vanable production overheads 8 10 12 8 Variable selling and distribution overheads Sofer 5 6 7 8. Fixed overheads 5 7 6 42 86 51 66 69 The direct labour wage rate is 24 per hour. Fixed overheads have been allocation the basis of direct labour hours. The company has commitments to produce a minimum of 400 units of each product per month direct hours cannot exceed 13,000 per month due to restriction of space. The Board is now considering an offer of a new three-year contract to produce an additional 400 units of product B per month at a selling price of 58 per unit. The contract would involve an outlay of 51,00,000 on the lease of additional factory premises and purchase of new plant and equipment. There would be residual value at the end of the contract. Variable production costs would be in accordance with existing standards, variable selling and distribution costs would be one-half of the existing rate and cash outflows on fixed costs would be 520,000 per annum. There would be no change to existing production arrangements. An outside supplier has offered to supply 400 units of product B per month at a price of 848 per unit. If pur-chased externally cash flows on additional fixed costs will be * 25,000 per annum. Required: Genommendations are by dictions, to show hou direct en ons in the thington should be used in order to mais profils show the butted toding results on the base of your recommendationin (5) Guestos to now whether or not the proped contact for products shotoboosoles whether it should be pached entendly a mantectures in the new periods. The comments Coto 10% the present role of an annuty of 31 for three years of 10% is ongetowolone production arrangements. An outside supplier has 248 per unit. If purchased externally cash flows on additional fixed costs will Required: (a) Give recommendations, supported by calculations, to show how direct labour hours in the existing factory should be utilised in order to maximize profits. [b] Show the budgeted trading results on the basis of your recommendations in (a) id Give calculations to show whether or not the proposed contract for product B should be accepted and, if so, whether it should be purchased externally or manufactures in the new premises. The company's cost of capital is 10% (the present value of an annuity of 1 for three years at 10% is 52.49). Ignore taxation and infiation E 90.00 21.00 32.00 Solution: A. Statement showing contribution per labour hour and determination of priority for profitability D A B i) Selling price 80.00 50.00 60.00 70.00 ii) Variable cost a. Direct material 9.00 10.00 17.00 12.00 b. Labour 16.00 20.00 24.00 28.00 c. Variable overheads 8.00 10.00 12.00 14.00 d. Variable selling & dis. Overheads 5.00 6.00 7.00 8.00 38.00 46.00 60.00 62.00 i) Contribution 12.00 14.00 10.00 18.00 iv) Contribution per labour hour 3.00 2.80 1.66 2.57 v) Priority | II IV 16.00 9.00 78.00 12.00 1.50 V B. Statement showing optimum mix under given conditions and computation of profit at that mix. A B D Total E 4,800.00 4,800.00 4,800.00 4,800.00 Minimum no. of units Units in remain hours (w) No. of units 4,800.00 3,000.00 7,800.00 4,800.00 4,800.00 4,800.00 14.00 4,800.00 10.00 12.00 18.00 93,600.00 67,200.00 48,000.00 86,400.00 Contribution per Unit ) Total contribution (5) Fixed cost (156000 hoursxl) () Profit ) 12.00 57,600.00 352,800.00 156,000.00 196,800.00 Working notes: Available hours 156,000.00 hrs. 144,000.00 hrs. Hours utilised for minimum {(4+5+6+7+8)x4800} 12,000.00 hrs. Remaining hours Therefore units of a to be produced (12000/4) 3000 units