(a) Shah Ltd needs a component for one of its products. It can have the component made by a subcontractor, who will charge $20 for each component. The business can produce the components internally for total variable costs of

$15 per component. Shah Ltd has no spare capacity, so it can produce the component internally only by reducing its output of another product. While it is making each component, it will lose contributions of $12 from this other product. Should the component be subcontracted or produced internally?

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(b) Khan Ltd can make three products (A, B and C) using the same machines. Various estimates for next year have been made as follows: Product Selling price Variable material cost Other variable production costs Share of fixed overheads Time per unit required on machines (hours) Fixed overhead costs for next year are expected to total $400,000. A B C $ $ S 300 390 200 150 180 100 60 100 50 80 2 120 3 40 1 (i) If the business made only product A next year, how many units would it need to make to break even? (Assume for this part of the question that there is no effective limit to market size and production capacity.) (ii) If the business has maximum machine capacity for next year of 10,000 hours, in which order of preference would the three products come? (iii) The maximum market for next year for the three products is as follows: Product A 3,000 units Product B Product C 2,000 units 5,000 units What quantities of which product should the business make next year, and how much profit would this be expected to yield?