A firm manufactures four products that use the same production facilities. The preliminary 2017 budget has been prepared and the details are as follows:-

Product A B C D

Sales units 1000 1200 1500 2000

000 000 000 000

Sales 300 384 720 480

Variable costs 220 240 330 240

Fixed costs 40 96 270 200

Total costs 260 336 600 440

Profit 40 48 120 40

The fixed costs were apportioned to products on the basis of direct labour hours. The overhead recovery rate was 20 per direct labour hour as the total fixed overheads were expected to be 606 000 and budget estimated that 30 300 direct labour hours would be worked during the year.

Required:-

1. After the budget had been prepared, it was found that only 24 300 direct labour hours were available. Which products should be produced and sold to maximise the companys profit as additional skilled labour is not available. It is also not possible to sell more than the budgeted sales units of any of the four products.

(b) It has been suggested that if the unit selling prices of all the products were increased by 10 per cent, the units sold would be reduced by 20 per cent. All these units could be produced within the constraint of the 24 300 labour hours. What will be the expected profit generated if this strategy is adopted?

(10 marks)

(c) What was the break-even of the firm when the budget was prepared?

(d) Discuss the usefulness to managers of an understanding of break-even analysis in the light of the assumptions which must be made when determining the break-even point of a firm.