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Question 3 Tsunamy Ltd. is a leading home appliances manufacturer. The company uses just-in-time manufacturing processes and holds no inventory. Manufacturing is done in batches of 150 units each which cannot be altered without significant cost implications. Although the products are produced in batches of 150 units, they are sold as single units at the market price. Due to fierce competition in the market, the company is forced to follow market price for each product. The following table provides the financial results of its four unique products. Particulars Alpha Beta Gamma Theta Total Units sold 210,000 250,000 260,000 250,000 Revenue $2,730,000 $4,625,000 $3,900,000 $3,250,000 $14,505,000 Less: Material cost $600,000 $1,820,000 $1,880,000 $1,000,000 $5,300,000 Less: Labour cost $800,000 $2,080,000 $1,280,000 $1,200,000 $5,360,000 Less: Overheads $800,000 $780,000 $320,000 $1,200,000 $3,100,000 Operating profit! $530,000 ($55,000) $420,000 ($150,000) $745,000 (loss) Since the company is concerned about loss in manufacturing and selling of two products, it has approached you to get a clear picture on its products and costs. You have conducted a detailed analysis whose findings are below: The overhead absorption rate of $2 per machine hour has been used to allocate overheads into the above product costs. Further analysis of the overhead cost shows that some of it is caused by the number of machine hours used, some is caused by the number of batches produced and some are product specific fixed overheads that would be avoided if the product were discontinued. Other general fixed overhead costs would be avoided only by the closure of the factory. Numeric details are summarised below: Amount ($) Amount ($) 620,000 460,000 Particulars Machine hour related overheads Batch related overheads Product specific fixed overheads: Alpha Beta Gamma Theta General fixed overheads Total . 500,000 600,000 100,000 220,000 . 1,420,000 600,000 3,100,000 The other relevant information is as follows: Particulars Machine hours Labour hours Alpha 420,000 100,000 Beta 370,000 260,000 Gamma 150,000 160,000 Theta Total 610,000 1,550,000 150,000 670,000 Required: (a) Prepare a profitability statement that is more useful for decision making than the profit statement prepared by Tsunamy Ltd. (9 Marks) (b) Calculate the break-even volume in batches and also in approximate units for each of the four products. (6 Marks) (9 + 6 = 15 Marks)