Individual Assignment (20%)

A manufacturing company with two factories. The West factory currently produces a number of products. Four of these products use differing quantities of the same resources. Details of these four products and their resource requirements are as follows:

Products J K L M

$/unit $/unit $/unit $/unit

Selling price 56 40 78 96

Directlabour ($8 per

hour) 20 16 24 20

Direct material A($3

perlitre) 6 3 0 9

Direct material B($5 per

kg) 10 0 15 20

Variable overhead(see note 1)

Labourrelated

Machine related 1.25 1.25 1 2 1.50 0.75 1.25 1

Total variable cost 38.50 22 41.25 51.25

Other data:

Machine hours per unit 5 8 3 4

Maximum demand per week 1,000 3,500 2,800 4,500

Note:

1. An analyses of the variable overhead shows that some of it is caused by the number of labour hours and the remainder is caused by the number of machine hours.

2. Currently, component P is purchased from an external supplier for $35 per component. A single unit of this component is used to producing N, the company’s only other product. Product N is produced in WZ’s other factory and does not use any of the resources identified above. Product N currently yields a positive contribution. The component could be manufactured in its West factory but to do so would require: 1 hour of direct labour, 0.5 machine hours, and 2kg of direct material B. 500 components are purchased per week as the company could not produce the component in its other factory.

3. The purchasing director has recently advised you that the availability of direct materials A and B is to be restricted to 21,000 litres and 24,000 kgs per week respectively. This restriction is unlikely to change for at least 10 weeks. No restrictions are expected on any other resources.

4. No inventory of either finished goods or raw materials are held.

5. A contract needs to be fulfilled, to deliver the following units of its products each week for the next 10 weeks:

Product Contract Units

J 100

K 200

L 150

M 250

Thee quantities are in addition to the maximum demand identified above.

REQUIRED:

a. Calculate whether component P should be purchased or manufactured internally

during the next 10 weeks. [14 marks]

b. Prepare a statement to show the optimum weekly usage of the West factory’s

available resources. [3 marks]

c. (i) Assuming no other changes, calculate the purchase price of the component Pat which your advice in part (a) above would change. [4 marks]

(ii) Explain TWO non-financial factors that should be considered before deciding whether or not to manufacture the component internally. [4 marks]