Case Study

Thorn Ltd produces and sells three products – X, Y and Z. Relevant information is given below.

Product X Product Y Product Z
£ per unit £ per unit £ per unit
Standard costs:
Direct materials 200 480 360
Variable overhead 48 28 64
Rate per hour
£ Hours
per unit Hours
per unit Hours
per unit
Department A 10 28 16 30
Department B 12 8 6 10
Department C 8 16 8 30

Total fixed overhead for the year was budgeted at £2,400,000.

The budget for the current financial year, which was prepared for a recessionary period, was based on the
following sales:

Product Sales in units Selling price per unit
£
X 15,000 840
Y 12,000 880
Z 12,000 1,200

The market for each of the products has improved, however, and the sales director believes that without a
change in selling prices, the number of units sold could be increased for each product by the following
percentages:

Product Increase
X 20%
Y 25%
Z 33?%

When the sales director’s views were presented to a management meeting, the production director declared that
although it might be possible to sell more units of product, output could not be expanded because he was
unable to recruit more staff for Department B, there being a severe shortage of the skills needed by this
department.
(a) (i) Show in the form of a statement for management, the unit costs of each of the three products and the
total profit expected for the current year based on the original sales figures. (13 marks)

(ii) State the profit if the most profitable mixture of the products was made and sold, utilising the higher
sales figures and the limitation on Department B. (20 marks)

(iii) Identify and comment on three possible problems which may arise if the mixture in (a) (ii) above were
to be produced.

(iv) Explain briefly the ways in which management can increase production
of product X.
(b) Describe briefly a technique for determining optimum output levels when there is more than one input
constraint.
(c) Describe briefly three ways in which the overall contribution to sales ratio could be improved

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