A company manufactures three products, Alpha, Beta and Gamma, the standard costs of which are as follows:

Alpha Beta Gamma

K K K

Materials 210 140 210

Labour:

Machinists (@ K15 per hour) 60 90 30

Assemblers (@ K10 per hour) 30 40 20

The companys fixed overheads for the forthcoming year (commencing 1st January) are expected to amount to K1,000,000.

The marketing director has estimated that demand for the forthcoming year will be:

Alpha 6,000 units at a selling price of K500 each

Beta 10,000 units at a selling price of K450 each

Gamma 8,000 units at a selling price of K400 each

But the production director has pointed out that machine capacity is currently 88,000 hours per annum, although this will increase to 120,000 hours per annum when the new plant (already on order) is delivered. However, this will not be during the year for which the budget is being prepared. The production director, anticipating the problem, has located a general engineering firm who are equipped to undertake work of appropriate quality and have quoted the following prices for production of the companys products on a sub-contracting basis:

Alpha K400 per unit

Beta K360 per unit

Gamma K320 per unit

(a) Advise the managing director how the services of the sub-contractor should be used to enable the company to meet the expected demand for its products in the most profitable manner, and show full details of the calculations upon which your advise is based.

(b) Prepare a statement showing the profit to be expected if your advice is followed.

(c) Briefly explain the reasoning you have applied in making your recommendation.

A company manufactures three products, Alpha, Beta and Gamma, the standard costs of which are as follows: Alpha K 210 Beta K 140 Gamma 210 Materials Labour: Machinists (@ K15 per hour) Assemblers (@ K10 per hour) 60 90 40 30 20 30 The company's fixed overheads for the forthcoming year (commencing 1st January) are expected to amount to K1,000,000. The marketing director has estimated that demand for the forthcoming year will be: Alpha Beta 6,000 units at a selling price of K500 each 10,000 units at a selling price of K450 each 8,000 units at a selling price of K400 each Gamma But the production director has pointed out that machine capacity is currently 88,000 hours per annum, although this will increase to 120,000 hours per annum when the new plant (already on order) is delivered. However, this will not be during the year for which the budget is being prepared. The production director, anticipating the problem, has located a general engineering firm who are equipped to undertake work of appropriate quality and have quoted the following prices for production of the company's products on a sub-contracting basis: Alpha Beta Gamma K400 per unit K360 per unit K320 per unit (a) Advise the managing director how the services of the sub-contractor should be used to enable the company to meet the expected demand for its products in the most profitable manner, and show full details of the calculations upon which your advise is based. Page 15 of 18 (b) Prepare a statement showing the profit to be expected if your advice is followed. (c) Briefly explain the reasoning you have applied in making your recommendation