Advanced: Calculation of optimal output level adopting a limiting factor approach and the computation of optimum selling prices using differential calculus AB p.l.c. makes two products, Alpha and Beta. The company made a £500 000 profit last year and proposes an identical plan for the coming year. The relevant data for last year are summarized in Table 1

Fixed costs were £480 000 for the year absorbed on machining hours which were fully utilised for the production ach1eved.
A new Managing Director has been appointed and he is somewhat sceptical about the plan being proposed Furthermore, he thinks that addilional machining capacity should be installed to remove any production bottlenecks and wonders whether a more flexible pricing policy should be adopted.
Table 2 summarizes the changes in costs involved for the extra capacity and gives price/demand data. supplied by the Marketing Department, applicable to the conditions expected in the next period.
Table2:
Costs Extra machining capacity would increase fixed costs by 10% 1n total. Variable costs and machining limes per unit would remain unchanged.

You are required to:

(a) calculate the plan to maximise profits for the coming year based on the data and selling prices in Table 1; (7 marks)

(b) comment on the pricing system for the existing plan used in Table 1; (3 marks)

(c) calculate the best selling prices and production plan based on the data in Table 2; (7 marks)

(d) comment on the methods you have used in part

(c) to find the optimum prices and production levels. (3 marks)
Any assumptions made must be clearly stated. (Total20 marks)
CIMA Stage 3 Management Accounting Techniques

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Table 1: Actuals for last year Actual production and sales (units) Product Product Alpha Beta Total costs per unit Selling prices per unit (25% on cost) Machining time per unit (hours) 20000 40000 20 40 25 50 2 Potential demand at above selling prices (units) 30000 50000