From one basic raw material a company produces two different grades of a product known as ‘Crude’ and ‘Refined’. The company’s direct labour wage rate is £3 per hour and it absorbs overhead into the cost of its two grades of product by means of variable and fixed overhead rates per 100 kilogrammes produced. The budgeted costs and selling prices for each grade are as follows: —

For the year ending 30th June, 19_5, the company’s effective annual production capacity is 120 000 labour hours and its estimated fixed production overhead costs total £480 000. Its sales policy is to sell 75% of its capacity in the more profitable grade and 25% in the less profitable grade.
Required:

(a) state on which grade of product the company should concentrate to obtain the highest profit—show your calculations;

(b) present a statement for management which shows the expected sales, variable costs (by element of cost) and contribution for each grade of product together with the overall net profit which can be expected for the year ending 30th June, 19_5, if the company’s present sales policy is followed. Budgeted fixed selling and administration costs are £90 000;

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Crude 100 kgs Refined 100 kgs Direct material 20.0 20.0 Direct wages 18.0 30.0 Variable production ovehead 3.6 7.5 Fixed production overhead 24.0 40.0 65.6 97.5 Selling prices 80.0 105.0