| Profit Maximisation - Exercise 3.40 | Unnamed: 1 | Unnamed: 2 | Unnamed: 3 | SOLUTION |
|---|---|---|---|---|
| (a) (i) | Contribution per Machine Hour | |||
| Selling Price | 65 | |||
| Less Variable Costs | ||||
| Materials | 19.0 | |||
| Variable Overhead | 4.0 | |||
| Labour (2.5 hours x £6) | 15.0 | 38 | ||
| Contribution per Unit | 27 | |||
| Machine Hours | 2 | |||
| Contribution per Machine Hour | 13.5 | |||
| (a) (ii) | Profit Earned | |||
| Contribution per Machine Hour | 13.5 | |||
| Machine Hours (75% x 130000 hours) | 97500 | |||
| Total Contribution | 1316250 | |||
| Less Fixed Costs | 350000 | |||
| 966250 | ||||
| (b) | Contribution per Machine Hour | |||
| Selling Price | 120 | |||
| Less Variable Costs | ||||
| Materials | 31.0 | |||
| Variable Overhead | 4.0 | |||
| Labour (4 hours x £8) + (0.5 hours x £6) | 35.0 | 70 | ||
| Contribution per Unit | 50 | |||
| Machine Hours | 4 | |||
| Contribution per Machine Hour | 12.5 | |||
| (c) (i) | Option 1 | |||
| Old Hours (130000 hours x 75%) | 97500 | |||
| Hours Available (130000 hours x 90%) | 117000 | |||
| Spare Capacity (117000 hours - 97500 hours) | 19500 | |||
| Profit Calculation | ||||
| Product A (97500 hours x £13.50) | 1316250 | |||
| Product B (19500 hours x £12.50) | 243750 | |||
| Total Contribution | 1560000 | |||
| Less Fixed Costs (£350,000 + £30,000) | 380000 | |||
| Profit | 1180000 | |||
| (c) (ii) | Option 2 | |||
| Profit Calculation | ||||
| Product B (10000 units x 4 hours = 40000 hours x £12.50) | 500000 | |||
| Product A (117000 hours - 40000 hours = 77000 hours x £13.50) | 1039500 | |||
| Total Contribution | 1539500 | |||
| Less Fixed Costs (£350,000 + £50,000) | 400000 | |||
| Profit | 1139500 | |||
| (c) (iii) | Option 3 | |||
| Profit Calculation | ||||
| Product A (97500 hours x £13.50) | 1316250 | |||
| Product B (10,000 units x 4 hours = 40000 hours x £12.50) | 500000 | |||
| Total Contribution | 1816250 | |||
| Less Fixed Costs (£350,000 + £100,000) | 450000 | |||
| Less Cost of Machines (£30,000 x 5 machines = £150,000 / 5 years) | 30000 | |||
| Profit | 1336250 | |||
| (d) | Existing Capacity (hours) | 130000 | ||
| New Machines Capacity (5000 hours x 5 machines) | 25000 | |||
| 155000 | ||||
| Product A | 97500.0 | |||
| Product B | 40000.0 | |||
| Maintenance | 15500.0 | 153000 | ||
| Spare Capacity | 2000 | |||
| hours | ||||
| (e) | Product A as it makes a Contribution per Machine Hour of £13.50 while | |||
| Product B only makes £12.50 (£1 per Machine Hour less). |