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COST AND MANAGEMENT ACCOUNTING

QUESTION 1

Wen Ltd produces three types of products, Silky, Dryee and Oilie.

All products are made from the same material Sulfate and use the same grade of workers and factory resources to produce them. The following information is available on each of the products:

Silky Dryee Oilie

Sulfate (grams) 50 70 80

Bottle (container cost) \$0.05 \$0.10 \$0.15

Direct labour (hrs) 0.25 0.25 0.50

The material Sulfam costs \$0.10 per gram and direct labour is paid at \$15 per hour. Variable factory overheads are absorbed at two thirds of the direct labour cost.

Fixed overhead for the year relating to production is estimated at \$40,500.

For the year 2006, it is expected the following to be sold:

Silky 9,980, Dryee 7,500 and Oilie 5,000.

The selling price per bottle of each type of product is expected to be:

Silky \$14.00, Dryee \$15.80 and Oilee \$22.65

It is expected that in the year 2006, supplies of Sulfate will be limited to a total of 1 million grams of sulfate, as there is a shortage of supply from the local suppliers due to the high demand.

Required:

(a) Assume that no alternative supplies of sulphate can be located in 2006 and a minimum of 2,500 bottles of each product must be produced during the year to meet the contracts already signed, calculate the number of bottles of each product that should be produced in order to maximise profit and state the amount of this profit.

Optimum production schedule

Silky Dryee Oilie

Selling price 14.00 15.80 22.65

Variable material 5.05 7.1 8.15

Variable labor 3.75 3.75 7.5

Total Variable cost 11.3 13.35 20.65

Contribution per bottle 2.7 2.45 2.00

Grams 50 70 80

Contribution per gram 0.054 0.035 0.025

Variable material

Silk =50 X 0.1 + 0.05 = 5.05

Dryee =70 X 0.1 + 0.10 = 7.1

Oilie = 80 X 0.1 + 0.15 = 8.15

Variable Labor

Silky = 15 X 0.25 = 3.75

Dryee = 15 X 0.25 = 3.75

Oilie = 15 X 0.50 = 7.5

Silky = 3.75 X 2/3 = 2.5

Dryee = 3.75 X 2/3 = 2.5

Oilie = 7.5 X 2/3 = 5

Contribution per bottle

Silky = 14.00 ÐC 11.3 = 2.7

Dryee = 15.80 ÐC 13.35 = 2.45

Oilie = 22.65 ÐC 20.65 = 2.00

Contribution per gram

Silky = 27/50 = 0.054

Dryee = 2.45/70 = 0.035

Oilie = 2.00/80 = 0.025

Grams for minimum production

Silky = 50 X 2,500 = 125,000

Dryee = 70 X 2,500 = 175,000

Oilie = 80 X 2,500 = 200,000

Total gram ÐC grams for minimum production

= 1,000,000 ÐC (125,000 ÐC 175,000 ÐC 200,000)

= 1,000,000 ÐC 500,000

= 500,000

Silky

50 X (9,980 ÐC 2,500) = 374,000

500,000 ÐC 374,000 = 126,000

Dryee

70 X (7,500 ÐC 2,500) = 350,000

350,000 > 126,000

126,000/70 = 1,800

Total contribution

= 2.7 X 9,980 + 2.45 X (2,500 + 1,800) + 2.00 X 2,500

= 26,946 + 10,535 + 5,000

= 42,481

Net profit = Total contribution ÐC Fixed overhead

= 42,481 ÐC 40,500

= 1,981

Bottle of Dryee = 2,500 + 1,800 = 4,300

The number of bottles of Silky that should be produced is 9,980.

The number of bottles of Dryee that should be produced is 4,300.

The number of bottles of Oilie that should be produced is 2,500.

The amount of the maximize profit is \$1,981.

(b) Assume that there is no limitation on the supply of sulphate and that there is no requirement to produce 2,500 bottles of each product but the direct labour is limited to 6,000 hours in 2006.

Calculate the number of bottles of each product that should be produced for the year and the maximum profit arising from this production level.

Optimum production schedule

Silky Dryee Oilie

Selling price 14.00 15.80 22.65

Variable material 5.05 7.1 8.15

Variable labor 3.75 3.75 7.5

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