Aut plc produces Umn, a product made popular by a recent television series, the selling price of which is £50. The unit cost structure based on the present level of production/sales of 100 000 units is:

The present level of production represents 100% of capacity working a single shift. The Marketing Manager estimates that at the present price the quantity sold during the next year could be increased by 50%.
A second shift has been proposed. This would increase production capacity to 180 000 Umns per annum, fixed costs increasing by £550 000 per annum. A shift work premium of 20% would be payable to the direct workers engaged on the additional shift; however, if production was at least 150 000 Umns per annum, the whole of the direct materials used would qualify for a discount of 10%.
Required:

(a) Calculate whether it would be profitable for Aut plc to add the second shift.

(b) Calculate the minimum annual increase in production/sales of Umn necessary to justify the additional shift. (6 marks)

(c) Outline any additional factors that would need to be considered before a final decision is made.

Transcribed Image Text:

Direct materials 20 5 Direct labour Variable overhead Fixed overhead 20 8