Brendol Ltd makes a range of products, many of which require the use of components that are either bought from a sub contractor or made by the business itself.
Three of the business’s products (‘Super’, ‘Basic’ and ‘Component 17’), whose production all require the same facilities, require the use of a raw material ‘XR5’. XR5 is not used on any other of the business’s products. The material is very difficult to work with and requires a high level of a special skill. Both the material and appropriate skilled labour is in limited supply.
All production labour is employed by the business on long term contracts, where workers are not laid off if there are surplus labour hours.
The budgeted per unit cost structures of the three products for the forthcoming year are as follows:
|
Super |
Basic |
Component 17 |
|
|
£ |
£ |
£ |
|
|
Raw materials |
24 |
19 |
16 |
|
Direct labour |
45 |
26 |
37 |
|
Variable overheads |
2 |
4 |
2 |
|
Fixed overheads |
37 |
19 |
29 |
|
108 |
68 |
84 |
Included in the raw material costs were the following amounts for XR5, which has a budgeted cost of £4 a gram:
|
£ |
|
|
Super |
12 |
|
Basic |
5 |
|
Component 17 |
11 |
Included in the direct labour costs were the following amounts for the special skilled labour (who work on the XR5), which is paid £12 an hour:
|
£ |
|
|
Super |
22 |
|
Basic |
19 |
|
Component 17 |
18 |
The Super and Basic are completed products that are sold to external customers at budgeted unit prices of £180 and £110 respectively. Component 17 is used as a component in another of the business’s products (the Deluxe). The final selling price of each Deluxe is £200 per unit, but further variable processing costs of £110 per unit will be incurred and fixed costs of £40 per unit will be absorbed.
The budgeted demand for the forthcoming year for the three products is:
|
units |
|
|
Super |
600 |
|
Basic |
500 |
|
Component 17 |
350 |
The demand for each product is independent of that for the other two.
The supply of XR5 during the forthcoming year is limited to 3,000 grams.
The maximum available amount of the special skilled labour during the forthcoming year is 2,600 hours.
Note that only one of these limitations will have the effect of restricting the business from satisfying the budgeted demand for the forthcoming year.
Required
(a) Show, with clear workings and justification, the optimal amount of each product that the business should produce during the forthcoming year.
(b) State and explain the assumptions which you have made in reaching your conclusion in requirement (a).
(c) State and explain the maximum amount that the business should pay for an additional hour of the special skilled labour and for an extra gram of XR5, should either become available at an appropriate time during the forthcoming year.