Question

Globe Enterprises is a very rapidly expanding con S is a very rapidly expanding company, with the demand for each of its four having risen rapidly over recent years. In planning for next year Globe Enterprises developed an initial budget assuming that it would operate at a maximum capacity of 30,000 direct labour hours (lah ,000 direct labour hours (labour hours being its main production constraint). At this level of production all fixed overheads would be recovered. Aspects of this initial budget are as follows. W 6,000 £30.00 X 12.000 f55.00 Y 5.400 £35.00 Z 4.200 $28.00 Demand (litres) Selling price per litre Costs per litre: Direct labour (£12 per hour) Direct materials Variable overhead (25% direct labour cost) Fixed overhead (100% direct labour cost) Total cost per litre £9.00 £6.50 £2.25 £18.00 £11.50 £4.50 £12.00 £4.00 £3.00 £6.00 £9.00 £1.50 £9.00 £18.00 £12.00 £6.00 £26.75 €52.00 £31.00 £22.50 Subsequent to the development of the initial budget it is realised that the company will only have 25,000 labour hours available for the coming period. In addition, management has decided it does not wish to increase the planned selling prices. Requirement (a) Given that only 25,000 labour hours will be available, determine the optimal production plan for the period and calculate the profit that this would yield. 16 Marks (b) Given the present labour restriction, suggest any possible ways in which Globe Enterprises might improve its overall profitability. 9 Marks Total 25 Marks

please answer both parts.

Answer 1

Answer is given below

Ranking of Contribution - per labor hour Total w £30.00 Y £35.00 Z €28.00 £55.00 Selling price Variable cost Direct material Direct labor Variable manufacturing overhead Total variable cost Contribution per unit Labour hour per unit Contribution per labor hour Ranking £6.50 £9.00 £2.25 £17.75 £12.25 0.75 £16.33 £11.50 £18.00 £4.50 £34.00 £21.00 1.50 £14.00 IV £4.00 £12.00 £3.00 £19.00 £16.00 £9.00 £6.00 £1.50 £16.50 £11.50 A 0.50 B £23.00 A/B 1.00 see working note below £16.00 0.75 a) Optimal production plan Total hours Demand (Litres) Labor hours allotted Balance to Product X Total labor hours Optimal production plan 1.00 5,400 5,400 0.50 4,200 2,100 1.50 6,000 12,000 4,500 13,000 13,000 6,000 8,667 (13,000/1.50) 12,000 13,000 25,000 24,267 4,500 5,400 5,400 2,100 4,200 Total a) Calculation of Total profit as per Optimal Production plan W X Production 6,000 8,667 Contribution per unit £12.25 £21.00 Total Contribution £73,500 £182,000 Fixed Cost Net Profit Y 5,400 £16.00 £86,400 Z 4,200 £11.50 £48,300 £390,200 £360,000 see working note below £30,200 b) Possible ways in which Globe Enterprises might improve its overall profitability - Getting extra labor through overtime payment - Outsourcing the production of X Working note: Total Direct labor Direct labor rate Direct labor hour per unit W £9.00 £12.00 0.75 X £18.00 £12.00 1.50 Y £12.00 £12.00 Z £6.00 £12.00 0.50 1.00 Fixed overhead rate per unit Units Total Fixed overheads £9.00 6,000 £54,000 £18.00 12,000 £216,000 £12.00 5,400 £64,800 £6.00 4,200 £25,200 £360,000