Frames Ltd make four different products: K, L, M and N. They have ascertained the cost of direct materials and direct labour and the variable overhead for each unit of product. An attempt is made to apportion the other costs in a logical manner. When this is done, 20 per cent is added for profit. The cost of direct labour and materials per unit is K: £28; L: £56; M: £120; N: £64. Variable overheads per unit are K: £8; L: £16; M: £26; N: £24. Fixed overhead costs of £3,800 are allocated per unit as K: £4; L: £8; M: £14; N: £12.

You are required to:

(a) Calculate the prices at which the units would be sold by Frames Ltd if the full cost system of pricing was adhered to.

(b) What would you advise the company to do if, because of market competition, prices had to be fixed at K: £66; L: £78; M: £140; N: £98?

(c) Assuming production of 100 units of each item per accounting period, what would be the net profit 

(i) If your advice given in your answer to (b) was followed; 

(ii) If the company continued to produce all of the items?

(d) What would you advise the company to do if, because of market competition, prices had to be fixed at K: £34; L: £96; M: £280; N: £78?

(e) Assuming production of 100 units of each item per accounting period, what would be the net profit 

(i) If your advice given in your answer to (d) was followed; 

(ii) If the company continued to produce all of the items?