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Illustration 16. (Optimum Mix) Zuid makes a range of five products to which the following standards apply: D E 90 21 Igna32 16 A 50 9 14 16 8 5 Sales price Direct materials Diect Wages PER UNIT B 80 70 60 12 10 17 The 28 Variable production overheads Tots 24 shs 20 14 Variable selling and distribution overheads LoftR 12 10 8 7 6. 8 7 6. 5 86 51 69 66 The direct labour wage rate is 4 per hour. Fixed overheads have been allocation the basis of direct labour hour cannot exceed 13,000 per month due to restriction of space. The Board is now considering an offer of a ne Fixed overheads 4 42 The company has commitments to produce a minimum of 400 units of each product per month direct hou three-year contract to produce an additional 400 units of product B. per month at a selling price of 758 percum The contract would involve an outlay of 31,00,000 on the lease of additional factory premises and purchase new plant and equipment. There would be residual value at the end of the contract. Variable production co would be in accordance with existing standards, variable selling and distribution costs would be one-half of existing rate and cash outflows on fixed costs would be 520,000 per annum. There would be no change to exist production arrangements. An outside supplier has offered to supply 400 units of product B per month at a price R48 per unit. If pur-chased externally cash flows on additional fixed costs will be * 25,000 per annum. Required: direct Inhour hours in the existing fac 69 42 51 66 The direct labour wage rate is 54 per hour. Fixed overheads have been allocation the basis of direct labour hours. cannot exceed 13,000 per month due to restriction of space. The Board is now considering an offer of a new The company has commitments to produce a minimum of 400 units of each product per month direct hours three-year contract to produce an additional 400 units of product B. per month at a selling price of 758 per unit The contract would involve an outlay of 31,00,000 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 320,000 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 348 per unit. If purchased externally cash flows on additional fixed costs will be 25,000 per annum. 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) (c) 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 2.49). Ignore taxation and inflation. Solution: A Statement showing contribution per labour hour and determination of priority for profitability D E A B 50.00 90.00 60.00 70.00 80.00 10.00 17.00 12.00 21.00 Selling price ) Variable cost a. Direct material b. Labour C. Variable overheads d. Variable selling & dis. Overheads 9.00 16.00 24.00 28.00 20.00 10.00 32.00 16.00 8.00 14.00 5.00 8.00 9.00 6.00 46.00 12.00 7.00 60.00 10.00 62.00 78.00 38.00 12.00 3.00 14.00 Contribution Contribution per labour hour v Priority 18.00 12.00 2.80 1.66 2.57 1.50 1 II IV DIL V B. Statement showing optimum mix under given conditions and computation of profit at that mix. A B D E Total 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 14.00 12.00 10.00 93,600.00 67,200.00 48,000.00 Contribution per Unit () Total contribution ) Fixed cost (156000 hoursxl) () Profit (3) 4,800.00 4,800.00 18.00 12.00 86,400.00 57,600.00 352.800.00 156.000.00 196.800.00 Working notes: 156,000.00 hrs. 144,000.00 hrs. Available hours Hours utilised for minimum {(4+5+6+7+8)x4800} Remaining hours Therefore units of a to be produced (12000/4) 12,000.00 hrs. 3000 units