Engineering Products pic manufactures a product PQR which is assembled from one component of P, one component of Q and one component ofR.

The company is working to its full machining capacity of 30 000 hours per period but has sufficient assembly capacity to increase sales as and when required.

The PQR product is made in batches of 100. Data relating to machining hours and costs per batch of 100 components are as follows:

The data relating to the variable and fixed costs of assembling a batch of 100 PQR products are as follows:

The selling price of one unit ofPQR is £12.
The Marketing Director believes he could sell a minimum of 25% more PQR products in the period and probably up to 50% more, ifthere were additional machining capacity to cope with the additional production.
The Production Director has sourced a supplier who could manufacture each ofthe components and has agreed the following prices in batches of 100 manufactured components:

The Managing Director wishes to purchase only one type of component from the outside supplier (i.e. P or Q or R) which would then be assembled by Engineering Products pic Required:

(a) Recommend which component should be purchased and how many should be purchased from the outside supplier, if 25% more products are to be produced and sold. (6 marks)

(b) Recommend which component should be purchased and how many should be purchased from the outside supplier, if the company is to produce and sell the maximum number of products up to a possible 50% increase. (6 marks)

(c) Contrast the profit earned in the period if no components are purchased from the outside supplier with the maximum possible profit which could be earned if one of the three components is purchased from the outside supplier.

Transcribed Image Text:

Component Machine- hours Variable Fixed costs Total costs costs () () () POR 25 hours 75 50 125 Q 50 hours 125 100 225 75 hours 150 150 300