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Question: Simco Ltd produces three products: Small, Large and Deluxe in two departments: Machining and Finishing. The following are the estimates for the next year:
Product Small Large Deluxe
Selling price per unit £96 £144 £204
Variable costs per unit £38 £64 £60
Machine hours per unit 1.5 1.6 3
Finishing hours per unit 1 2 4
Annual demand 20,000 20,000 15,000
The annual fixed operating costs are £1,088,000 for the Machining department and £1,400,000 for the Finishing department. The annual capacity for Machining department is 85,000 machine hours and 140,000 finishing hours for the Finishing department.
Required: (a) Calculate the full absorption costs, % mark up and profit margin for each of the three
products. Use the annual capacity as the denominator for the fixed costs allocation. (20 marks)
(b) There is insufficient production capacity to meet all the annual demand, so in order to make the highest profit, the sales manager suggests that the products with the highest % mark-up should be produced first, followed by the next highest £ mark-up and so on. Using appropriate calculation, explain to the sales manager whether this would result in the best use of the productive capacity and thus the highest profit for the company. Include in your answer calculations of total manufacturing profit. (50 marks)
(c) Simco Ltd is considering using some modern equipment in the finishing department that
would increase annual finishing capacity by 6,000 hours. The annual cost of these jigs and tools is £30,000. Provide calculations to indicate whether Simco Ltd should acquire these tools. (10 marks)
(d) The production manager of the Machining department has submitted a proposal to
rearrange certain areas of the production area and appoint an additional supervisor to enable faster setups. This would increase the annual capacity of the Machining department by 10,000 hours and cost £50,000 per year. Provide calculations to indicate whether Simco Ltd should implement the change. (20 marks)
(Total 100 marks)
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