Morro and Son, a small but specialized engineering business, manufacture and sell three products; M, R, and S. For the year ending 30 June 19_2 the activity programme is expected to be:

Required:

(a) Calculate the profit for the year ending 30 June 19_2 if actual activity were as expected. (3 marks)

(b) Calculate the change in the profits for the year if the business were to accept a sub-contract from a larger firm to produce an additional 50 units of product S at a selling price of £90 each. Assume that the resources would be available subject to the need to buy additional machinery at a cost of £2 300 which, it is estimated, would have a scrap value of £300 after its useful life of 4 years; use of this machinery would incur annual running costs of £300 per annum. (6 marks)

(c) Calculate which of the products would provide the largest profit if existing direct labour (as inferred by direct wages in the table above)
could be applied to the exclusive production of M, R, or S without any change in the total fixed overheads. It may be assumed that the same type of machining and labour is required in the production of all three products; direct labour receives the same rate of remuneration whichever product is manufactured. (8 marks)

(d) A brief report comparing the total profits for the business for the year under the existing programme as modified by proposal

(b) and under proposal (c); state the practical considerations to be borne in mind before deciding whether or not to adopt either change from the original plan.

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Product Direct Materials Direct Wages Overhead (25% Fixed) Total Sales Quantities Units MPS 4.000 8 000 16.000 40 000 400 R 19 200 12.000 24 000 72.000 600 12.000 12 000 24 000 60 000 600