Following a fire at the factory of Elgar Ltd, the management team met to review the proposed operations for the next quarter. The fire had destroyed all the finished good stock, some of the raw materials, and about half of the machines in the forming shop.

At the meeting of the management team, the following additional information was provided:

(i) Only 27000 machine hours of forming capacity will be available in the forthcoming quarter Although previously it was thought that sales demand would be the only bidding limitation on production, it has now become apparent that for the forthcoming quarter the forming capacity will be a limiting factor

(ii) It will take about 3 months to reinstate the forming shop to its previous operational capacity; the restriction on forming capacity is thus for the next quarter only

(iii) Some details of the product range manufactured by Elgar are provided in the following table:

ELGAR LTD Per unit detail product range of Product A 8 c D

$ $ $ $

Sales price 50 60 40 50 Units of special material required for production WorX 2 2 2 1 y

z 1 2 1 1 Other direct material cost 6 12 6 5 Other variable production cost 8 4 8 4 Fixed production cost (Based on standard cost) 6 3 6 3 Forming hr required 5 6 2 10

(iv) The forecast of demand, in units, for the coming quarter is:

Product A Units demanded 2000 8

2000 c

4000 D

3000 E

4000 E

$

80 3

6 13 4

3 6

It was originally intended that the number of units produced would equal the units demanded for each product

(v) Due to a purchasing error, there is an excess of material Win stock; this has a book value of $6 per unit which is also its current replacement cost; this could be sold to realise $4 per unit after sales and transport costs Material X could be used instead of Material W; Material X is not in stock, and has a current replacement cost of $5 per unit (vi) Material Y was in stock at a book value of $2 per unit, which is its normal cost if ordered 3 months in advance, but the stocks of this material were entirely destroyed by the fire; in order to obtain the material quickly, a price of $3 per unit will have to be paid for the first 3000 units obtained in the quarter, and any additional units required will cost $6 per unit; these special prices will apply only to this quarter's purchases (vii) Some of the stock of material Z was destroyed by the fire; the remaining stocks of 2000 units have a book value of $7 per unit; the replacement price for Z is currently $8 per unit (viii) As a result of the fire, it is estimated that the fixed production cost will be $42000 for the next quarter, and the administration and office overhead will amount to $11500 (ix) The demand figure shown in (iv) includes a regular order from a single customer for 3000 units of C and 3000 units of E; this order is usually placed quarterly, and the customer always specifies that the order be fulfilled is total, or not at all REQUIRED

(a) Ignoring the information contained in (ix) forth is section of the question, determine the optimum production plan for the forthcoming quarter, and prepare a statement which indicates to the management of Elgar Ltd the estimated financial results of their planned production, in terms of total contribution, net current operating profit and financial accounting profit

(b) Prepare a statement which clearly shows the management of Elgar Ltd the financial consequences of both acceptance and rejection of the order mentioned in (ix)
Advise Elgar Ltd on the desirability of acceptance of the order in total Indicate what further information would be useful in arriving at a decision whether to accept or reject the order ACCA. PE, Section 2, Paper 14, Accounting 5, Management Accounting, December 1981.