Reed Ltd manufactures three products A, B and C. Budgeted costs and selling prices for the three months ending 30 September 2002 are as follows:

Labour costs are 3 per hour, and material costs are 4 per kilo for all products. The total fixed costs are of a general factory nature, and are unavoidable. The company has been advised by its supplier that due to a material shortage, its material requirement for the month of September will be reduced by 15 per cent. No other changes are anticipated.

Required: 

A. A statement to show the maximum net profit for the three months ending 30 September 2002, taking into account the material shortage for the month of September.

B. Explain how the fixed cost element is dealt with in marginal costing and in absorption costing. Briefly explain how this affects any closing stock valuation.

Transcribed Image Text:

A B C 6,000 8,000 5,000 f 45 44 37 Sales (units per month) Selling price per unit Unit costs Direct labour Direct materials* Variable overhead Fixed overhead 16 9729 2235 24 20 6045