| Profit Maximisation - Exercise 3.39 | Unnamed: 1 | Unnamed: 2 | Unnamed: 3 | Unnamed: 4 | SOLUTION |
|---|---|---|---|---|---|
| X | Y | Z | Total | ||
| (a) (i) | Total Machine Hours in Year 1 | ||||
| Machine Hours | 2 | 6 | 4 | ||
| Units | 11000 | 5000 | 7000 | ||
| 22000 | 30000 | 28000 | 80000 | ||
| hours | |||||
| (a) (ii) | Fixed Overheads Recovery Rate per Machine Hour | ||||
| Fixed Costs / Machine Hours | |||||
| £240,000 / 80000 hours | |||||
| £3 per Machine Hour | |||||
| (b) (i) | Unit Contribution | ||||
| Selling Price | 25 | 82 | 80 | ||
| Less Variable Costs | |||||
| Materials | 5 | 8 | 22 | ||
| Labour | 12 | 36 | 24 | ||
| Variable Overhead | 4 | 2 | 6 | ||
| 21 | 46 | 52 | |||
| Unit Contribution | 4 | 36 | 28 | ||
| (b) (ii) | Unit Profit or Loss | ||||
| Unit Contribution | 4 | 36 | 28 | ||
| Less Fixed Costs | 6 | 18 | 12 | ||
| Profit (Loss) | -2 | 18 | 16 | ||
| (c) | Total Profit in Year 1 | ||||
| Unit Profit/Loss | -2 | 18 | 16 | ||
| Units | 11000 | 5000 | 7000 | ||
| -22000 | 90000 | 112000 | |||
| Profit | 180000 | ||||
| (d) | Effect on Profit | ||||
| Profit | 180000 | ||||
| Less Contribution of X | £4 x 11000 Units | 44000 | |||
| New Profit | 136000 | ||||
| It would have reduced the Profit by £44,000. | |||||
| (e) (i) | Extra Hours of Production | ||||
| 80000 hours / 80 x 100 | 100000 | ||||
| hours | |||||
| Extra Hours (10000 hours - 80000 hours) | 20000 | ||||
| hours | |||||
| (e) (ii) | Contribution per Machine Hour | ||||
| Contribution per Unit | 4 | 36 | 28 | ||
| Machine Hours | 2 | 6 | 4 | ||
| 2 | 6 | 7 | |||
| Order of Priority | 3 | 2 | 1 | ||
| Increase in Number of Units of Product Z | |||||
| Extra Hours | 20000 | ||||
| Machine Hours | 4 | ||||
| 5000 | |||||
| Units | |||||
| Increase in Profit in Year 2 | |||||
| Increase in Contribution (5000 Units x £28) | 140000 | ||||
| Less Increase in Fixed Costs (10% x £240,000) | 24000 | ||||
| Increase in Profit in Year 2 | 116000 | ||||
| (f) | Cost of Component | ||||
| Materials | 5 | ||||
| Labour | 12 | ||||
| 17 | |||||
| Add Opportunity Cost (Loss in Production of X = 2 hours x £2) | 4 | ||||
| 21 | |||||
| Do not make the special component as it is £3 cheaper to buy rather | |||||
| than make yourself. | |||||
| (g) | New Contribution (SP - VC) | 18 | |||
| Total Gain (£18 x 1500 units) | 27000 | ||||
| Machine Hours Required | |||||
| Hours Required (1500 Units x 6 Hours) | 9000 | ||||
| hours | |||||
| Loss in Production of X | |||||
| Reduction in Units (9000 Hours / 2 Hours) | 4500 | ||||
| Units | |||||
| Loss (4500 Units x £4) | 18000 | ||||
| Overall Profit From Special Order | |||||
| Total Gain in Y | 27000 | ||||
| Total Loss in X | 18000 | ||||
| Profit | 9000 | ||||
| Accept Order as you will make an additional profit of £9,000. |