Question
Allied Ltd produces three products Choc, Colt and Late which use the same supplies but in differing quantities. Product Choc uses one unit of component
Allied Ltd produces three products Choc, Colt and Late which use the same supplies but in differing quantities. Product Choc uses one unit of component Nut that is procured from external suppliers at $ 120 per unit. Details of the three products are as follows: Choc Colt Late Demand Per year (units) 9,000 5,700 7,800 Per unit Per unit Per unit $ $ $ Selling Price 310 275 224 Component Nut 120 - - Direct Materials ($ 8 per kg.) 24 32 24 Direct labour ($ 40 per hour) 20 60 40 Unskilled labour ($ 24 per hour) 18 24 36 Variable Overhead ($ 6 per machine hour) 18 24 24 Fixed costs for the year are $ 15,000,000 Direct labour is available to the extent of 16,200 hours. Other resources are adequate to meet the yearly requirement. Production department of the company made the proposal to manufacture the component 'Nut' in house with the following costs information, with no change in the above marginal costs of manufacturing the three products: Direct Materials $24 Direct Labour $40 Unskilled Labour $8 Variable Overhead $18 Total $90 The production of Nut will change the yearly fixed costs and hence, the company can either buy the component or make it in house. Required: RECOMMEND the optimum production plan and profit for the year. Show calculation in support
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