Advanced: Cost per unit calculation and decision-making A chemical company has a contract to supply annually 3600 tonnes of product A at £24 a tonne and 4000 tonnes of product B at £14.50 a tonne. The basic components for these products are obtained from a joint initial distillation process. From this joint distillation a residue is produced which is processed to yield 380 tonnes of by¬ product Z. By-product Z is sold locally at £5 a tonne and the net income is credited to the joint distillation process.

The budget for the year ending 30 June 2001 includes the following data:

Since the budget was compiled it has been decided that an extensive five-week overhaul of the joint distillation plant will be necessary during the year. This will cost an additional £17000 in repair costs and reduce all production in the year by 10%. Supplies of the products can be imported to meet the contract commitment at a cost of £25 a tonne for A and £15 a tonne for B.
Experiments have also shown that the joint distillation plant operations could be changed during the year such that either:
(i) The output of distillate for product A would increase by 200 tonnes with a corresponding reduction in product B distillate. This change would increase the joint distillation variable costs for the whole of that operation by 2%. or (ii)The residue for by-product Z could be mixed with distillate for products A and B propor¬ tionate to the present output of these products. By intensifying the subsequent processing for products A and B acceptable quality could be obtained. The intensified operation would increase product A and B separable fixed costs by 5% and increase the evaporation loss for the whole operation to 11% and 21% respectively.
You are required to:

(a) calculate on the basis of the original budget:
(i) the unit costs of products A and B; and (ii) the total profit for the year;

(b) calculate the change in the unit costs of pro¬ ducts A and B based on the reduced production;

(c) calculate the profit for the year if the shortfall of production is made up by imported products;

(d) advise management whether either of the alternative distillation operations would improve the profitability calculated under

(c) and whether you recommend the use of either.

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Variable cost per tonne of input () Fixed costs for year () Evaporation loss in process (% of input) Joint Separable cost By- Process Product Product product A B Z 5 11 2 1 5000 4000 8000 500 6 10 20 5