Question from the Institute of Chartered Accountants in Ireland, Professional Examination 3, Management Accounting & Business Finance II, Summer 1996. (40 minutes)

Engineering Products plc manufactures a product PQR which is assembled from one component of P one component of Q and one component of R.

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: njuy41

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 plc.
Note: Candidates can assume that there is no increase in total fixed costs in the Machining or Assembly Departments arising from increases in production.
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. (8 marks)
Total marks = 20

Transcribed Image Text:

COMPONENT MACHINE HOURS VARIABLE COSTS (E) FIXED COSTS TOTAL COSTS () () POR 25 hours 75 50 125 50 hours 125 100 225 75 hours 150 150 300 The data relating to the variable and fixed costs of assembling a batch of 100 PQR products are as follows: Variable costs Fixed costs The selling price of one unit of PQR is $12. 300 100 The Marketing Director believes he could sell a minimum of 25% more PQR products in the period and probably up to 50% more, if there were additional machining capacity to cope with the additional production. The Production Director has sourced a supplier who could manufac- ture each of the components and has agreed the following prices in batches of 100 manufactured components: Component P Q R 150 265 330