A company makes three products. A, B and C. AU three products require the use of two types of machine, cutting machines and assembling machines.

Estimates for next year include the following:

Fixed overhead costs for next year are expected to total £42,000. It is the company’s policy for each unit of production to absorb these in proportion to its total variable costs.
The company has cutting machine capacity of 5,000 hours per annum and assembling machine capacity of 8,000 hours per annum.

(a) State, with supporting workings, which products in which quantities the company should plan to make next year on the basis of the above information.

(b) State the maximum price per product that it would be worth the company paying a subcontractor to carry out that part of the work which could not be done internally.

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Examination-style questions Product A Product B Product C Selling price (per unit) 25.00 30.00 18.00 Sales demand (units) 2,500 3,400 5,100 Direct material cost (per unit) 12.00 13.00 10.00 Variable production cost (per unit) 7.00 4.00 3.00 Time required per unit on cutting machines 1.0 hours 1.0 hours 0.5 hours Time required per unit on assembling machines 0.5 hours 1.0 hours 0.5 hours