A small company classifies all its production overheads of £2 400 per week as fixed. The company currently produces 150 components per week on a sub-contracting basis and has been asked by its major customer to increase its output. Management is reluctant to operate for more than the normal 40 hours each week but in an attempt to meet its customer’s wishes decides to offer an incentive scheme to its four direct operators whose current rates of pay are as follows:

With the agreement of the employees, who are not members of a trade union, their basic hourly rates are to be reduced for a trial period of four weeks to those shown below but with each of them being given a bonus of £0.60 for every unit produced.

After the first week of the trial period, production was 180 units. The production manager studied the results and believed the introduction of the bonus was too costly because the increase of 20% in production had increased labour costs by 32%. He is considering recommending changes to the newly-introduced scheme.
Required:

(a) calculate how the increase in labour cost of 32% was derived;

(b) comment on whether the production manager was correct in assuming that the bonus scheme was too costly, showing your supporting calculations.

Transcribed Image Text:

G Ahmed Hourly rate 3.00 A Brown 3.00 D Choudery 4.00 G Spencer (working Foreman) 5.00