Question 1

Michelben plc is an electronics business that manufactures a range of video recorders. The business is considering production of a new sophisticated video recorder, the ‘Spartan’, that it has recently developed. To manufacture these would require a significant outlay on purchasing new plant and machinery. The production director has identified two options:

(1) A capital-intensive process with high capacity and a low variable cost.

(2) A  labour-intensive  process  with  medium  capacity  and  a  moderate variable cost.

The purchasing director has, however, identified a third option:

(3) Having the ‘Spartan’ made by a Korean business that has undertaken sub-contract work for Michelben plc before. Under this option Michelben plc would simply sell the Spartan, under its own brand name.

The estimated useful economic life of the new plant and machinery under the first two options would be four years and there would be a zero-residual value for plant and machinery. The term of the contract in Option (3) would also be four years.

The finance director has estimated the following:

The business’s cost of capital is expected to remain at 15% per annum. Selling prices would be constant at £250 per unit.

The newly appointed accountant has drawn up a schedule of expected profit per unit of output assuming that each option was operating at its maximum annual capacity. The schedule is as follows:

Costs and selling prices are expected to remain constant over the next ten years in all three options.

Question 2

Elfina Ltd is a large clothing manufacturing company and its plant in Stoke- on-Trent produces two types of lady’s coats. Due to shortages in some raw materials, the management team of the plant is having difficulty deciding on the optimum production schedule for the forthcoming period. You have been asked to analyse the situation and have been presented with the data which are set out below.

The expected demand and selling prices for the four coats manufactured at the Longford plant are as follows:

The availability of the materials required for the manufacture of the coats is:

Required:

Advise the management team of the plant of the optimum product mix of Coat 3 and Coat 4, for the purposes of maximizing contribution earned in the forthcoming period.                                                            [30 MARKS]

Question 3

KLM Limited manufactures and sells three styles of kitchen faucets: Brass, Green,  and  White.  The  accountant  provided  the  following  financial information:

BRASS    GREEN  WHITE

Projected sales in units        30,000      50,000  40,000

labour hours (traditional system)£12           £ 3        £ 9

The company identified two activities that can explain the total overhead cost: setups and inspections. Total overhead costs and activity levels for the year are estimated as follows:

Activity            Overhead costs          Activity levels

Setups                     £465,500               95 setup hours

Inspections              £405,000   2,700 inspection hours

£870,500

Hours per 1000-unit batch:     BRASS  GREEN WHITE

Setup hours                                 1.0             0.5        1.0

Inspection hours                          30              20         20

Required:

(a)    Use the traditional system to determine the operating profit per unit for each style of faucet. [6 MARKS]

(b)    Determine the activity-cost-driver rate for setup costs and inspection costs. [6 MARKS]