The initial market response has been positive and management is also considering the manufacture of a...

 

 

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The initial market response has been positive and management is also considering the manufacture of a high quality camping chair. The chair has the following cost structure: R 480 Selling Price Direct Labour Direct Material Variable Overhead (80) (120) (50) 230 For fixed overhead allocation purposes, the chair is expected to spend an hour in each production department during the manufacturing process. The initial demand for the chair is expected to be approximately 4 000 units per annum. Although the chairs can be manufactured without any increase in fixed overheads, direct labour is limited to 30 000 hours due to the unavailability of skilled labour. The variable selling cost per unit is at R25. The owner has requested that 500 chairs also be kept as closing stock at year-end. 4. Calculate the product mix that will maximise profits. (14) 5. Based on the profit maximising product mix calculated in 4 above, prepare a budgeted income statement using variable costing principles. (14) 6. Based on the profit maximising output calculated in 4 above, prepare a budgeted income statement using absorption costing principles. (12) Selling Price Direct Labour (2 hours) Direct Material Variable Overhead An estimate of the annual overheads in respect of production of the new table is presented below: Supervisor's salary Electricity Depreciation Quality Control Rent, rates and taxes Indirect materials % of indirect materials used Book value of machinery Megawatt hours Employees The entity will consist of two manufacturing departments (assembly and painting) and a maintenance department. For fixed overhead allocation purposes, the table will spend an hour in each of the manufacturing departments. The production manager has provided you with the following planned activity for each of the departments: Painting 55 Floor area occupied (m2) Maintenance hours Number of inspections Machine Hours Labour hours Assembly 40 R500 000 2 000 10 1 000 200 400 4 000 10 000 245 (40) (60) (25) 120 R500 000 1 000 8 800 450 200 7 500 6 000 R 160 000 75 000 250 000 150 000 75 000 75 000 785 000 Maintenance 5 R250 000 500 2 400 The demand for the table is expected to be 10 000 units in the first year and the owner has requested that the closing stock for the year be 500 units. In addition to the above, manufacturing overheads, the expected sales and marketing costs are R500 000 per annum (of which 50% are fixed). At a recent strategy session, the owner remained committed to commence the venture. However, he voiced concern about the recent labour problems that several business sectors have been experiencing. He advised that he is considering focusing on the design and marketing of camping equipment and outsourcing all manufacturing to a local sports equipment manufacturer. The initial market response has been positive and management is also considering the manufacture of a high quality camping chair. The chair has the following cost structure: R 480 Selling Price Direct Labour Direct Material Variable Overhead (80) (120) (50) 230 For fixed overhead allocation purposes, the chair is expected to spend an hour in each production department during the manufacturing process. The initial demand for the chair is expected to be approximately 4 000 units per annum. Although the chairs can be manufactured without any increase in fixed overheads, direct labour is limited to 30 000 hours due to the unavailability of skilled labour. The variable selling cost per unit is at R25. The owner has requested that 500 chairs also be kept as closing stock at year-end. 4. Calculate the product mix that will maximise profits. (14) 5. Based on the profit maximising product mix calculated in 4 above, prepare a budgeted income statement using variable costing principles. (14) 6. Based on the profit maximising output calculated in 4 above, prepare a budgeted income statement using absorption costing principles. (12) Selling Price Direct Labour (2 hours) Direct Material Variable Overhead An estimate of the annual overheads in respect of production of the new table is presented below: Supervisor's salary Electricity Depreciation Quality Control Rent, rates and taxes Indirect materials % of indirect materials used Book value of machinery Megawatt hours Employees The entity will consist of two manufacturing departments (assembly and painting) and a maintenance department. For fixed overhead allocation purposes, the table will spend an hour in each of the manufacturing departments. The production manager has provided you with the following planned activity for each of the departments: Painting 55 Floor area occupied (m2) Maintenance hours Number of inspections Machine Hours Labour hours Assembly 40 R500 000 2 000 10 1 000 200 400 4 000 10 000 245 (40) (60) (25) 120 R500 000 1 000 8 800 450 200 7 500 6 000 R 160 000 75 000 250 000 150 000 75 000 75 000 785 000 Maintenance 5 R250 000 500 2 400 The demand for the table is expected to be 10 000 units in the first year and the owner has requested that the closing stock for the year be 500 units. In addition to the above, manufacturing overheads, the expected sales and marketing costs are R500 000 per annum (of which 50% are fixed). At a recent strategy session, the owner remained committed to commence the venture. However, he voiced concern about the recent labour problems that several business sectors have been experiencing. He advised that he is considering focusing on the design and marketing of camping equipment and outsourcing all manufacturing to a local sports equipment manufacturer.

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Problem 4 Calculate the product mix that will maximise profits To calculate products sales divided b... View the full answer