Question

$1$

$($

Relevant Costing

$)$

Omega Manufacturing Ltd

$($

OML

$)$

$$manufactures secure business document storage

systems for UK business clients. In the coming year, the company plans to sell

$2$

$6$

$0$

$,$

$0$

$0$

$0$

$$SDS

$1$

$0$

$0$

$0$

$$systems$,$ which is the maximum expected demand for this type

of secure system globally.

The variable costs and selling price data for SDS

$1$

$0$

$0$

$0$

$$are as follows:

Fixed overhead costs are predicted to be

$$

$5$

$6$

$0$

$,$

$0$

$0$

$0$

$,$

$0$

$0$

$0$

$$in the coming year.

Having extended the factory to increase manufacturing capacity, OML is planning on

introducing two new models of storage systems. First, the SDS

$2$

$0$

$0$

$0$

$,$

$$which will serve a new

market for accessible systems with greater moisture and temperature controls. Secondly,

responding to demand for lockdown systems, the SDS

$3$

$0$

$0$

$0$

$$offers a sealed configuration

that will address those ultra

$-$

hostile environments where critical documents need to be

preserved under very high temperature and pressure conditions. Production of the

SDS

$2$

$0$

$0$

$0$

$$and SDS

$3$

$0$

$0$

$0$

$$has not yet begun, and orders have not yet been accepted.

SDS

$2$

$0$

$0$

$0$

$$and SDS

$3$

$0$

$0$

$0$

$$systems will use the same labour but different types of material to

the current SDS

$1$

$0$

$0$

$0$

$$product range.

Data are as follows:

S

$0$

$5$

$2$

$0$

$0$

$0$

$$Demand units

Materials per unit

$($

$$

$1$

$3$

$4$

$.$

$0$

$0$

$$per

$$

$$

Labour

$($

$3$

$0$

$$hours per unit

$)$

Variable ovecheads

$($

$1$

$2$

$$hours per unit

$)$

Total variable costs

Proposed seling price

Labour is expected to be in short supply because of ongoing industrial action and is

predicted to be limited to

$1$

$9$

$,$

$4$

$0$

$0$

$,$

$0$

$0$

$0$

$$hours in the coming year for OML.

Required:

$($

a

$)$

$$Prepare a production plan for the three products

$($

in units

$)$

$$that

makes the best use of the labour avalable.

$($

b

$)$

$$The largest customer for the SOS

$1$

$0$

$0$

$0$

$$has been in

$($

$8$

$$marks

$)$

discussion with you and wamed OML that they will take thelt

business to a competitor if they do not get all the units they

need. Discuss the market implications for producing the

products according to proft optimisation, assuming that there

is no possiblity of sourcing replacement product from

subcontractors. Consider the reaction of customers and

competitors to the unavaliablity of some products from OML's

factory and advise the directors how they can limit possible

negative reactions from customers in the short term.