Arncliffe Limited manufactures two types of product marketed under the brand names of  ‘Crowns’ and ‘Kings’. All the company’s production is sold to a large firm of wholesalers.

Arncliffe is in something of a crisis because the chief accountant has been taken ill just as the company was about to begin negotiating the terms of future contracts with its customer. You have been called in to help and are given the following information relating to each product for the last year. This information has been prepared by a junior assistant.

Report on revenues/costs for the year just ended:

The junior assistant says in his report, ‘As you can see, Crowns make twice as much profit as Kings and we should therefore stop manufacturing Kings if we wish to maximise our profits. I have allocated floor space costs and insurances on the basis of the labour costs for each product. All other costs/revenues can be directly related to the individual product.’

Further investigation reveals the following information:

(i) The wholesaler bought all the 20,000 Crowns and 10,000 Kings produced last year, selling them to his customers at £4 and £3 each respectively. The wholesaler is experiencing an increasing demand for Crowns and intends to raise his price next year to £4.50 each.

(ii) Crowns took 8,000 hours to process on the one machine the company owns, whereas Kings took 2,000 hours. The machine has a maximum capacity of 10,000 hours per year.

(iii) Because all production is immediately sold to the wholesaler no stocks are kept.

Required:

(a) Prepare the revenue/cost statement for the year just ended on a marginal cost basis, and calculate the rate of contribution to sales for each product.

(b) You are told that in the coming year the maximum market demand for the two products will be 40,000 Crowns and 36,000 Kings and that the wholesaler wishes to sell a minimum of 6,000 units of each product. Calculate the best product mix and resulting profit for Arncliffe Limited.

(c) Calculate the best product mix and resulting profit for Arncliffe Limited if another machine with identical running costs and capacity can be hired for £20,000 per annum. Floor space and insurance costs would not change and the maximum and minimum conditions set out in (b) above continue to apply.

(d) What points does Arncliffe Limited need to bear in mind when negotiating next year’s contract with the wholesaler?

Transcribed Image Text:

Sales Floor space costs (rent and rates) Raw materials Direct labour Insurances Machine running costs Net profit Crowns £ 60,000 10,000 8,000 20,000 400 12,000 9,600 Kings £ 25,000 5,000 2,000 10,000 200 3,000 4,800