Case Study 2 The management of Pink Engineering bv ('PEbv'), a business based in the Netherlands, is currently considering its budget for the financial year commencing on 1 June. PEbv manufactures some specialist equipment for various contractors involved the defence industry so all of its products have code names. Discussions between the purchasing, sales and manufacturing departments are focusing on the desirability of continuing to manufacture the Kay and Ell final products and the two component assemblies, Emm1 and Emm2 (neither of which are included in the Kay and Ell products). To assist the budget process, the CFO has provided the following cost data, based on the Chief Operating Officer's current planned output. The purchasing director has obtained quotations from outside suppliers for both final products and both assemblies, as follows: The sales director has indicated that there are strong competitive pressures at work which will restrict the achievable unit selling price for the Kay to 360 and the El to 945. Therefore, his view is that the manufacture of both products should be terminated because unit cost exceeds unit selling price. Fixed overheads are apportioned to all products and assemblies on the basis of 175% of direct labour cost. PEbv manufactures a wide range of other products and assemblies. The Chief Operating Officer advises that, unless advised to the contrary, her manufacturing budget for next year comprises: In the event of the manufacture of Emm1 being discontinued, she has identified that 21,000 of fixed overhead will be saved over the year. However, she is also concerned that output will be limited due to potential operational difficulties (shortages of spares) on a key machine involved in the manufacture of all of these items. Budgeted machine usage per item is: Required: 1. Advise the management on the desirability of manufacturing or sub-contracting the two components Emm1 and Emm2. Outline the reasoning behind your recommendations. Show all workings. (7 marks - 175 maximum word limit) 2. Advise the management of the profitability of Kay and Ell, indicating whether it should continue to manufacture or sub-contract them out. Outline the reasoning behind your recommendations. Show all workings. ( 8 marks - 200 maximum word limit) 3. If the operational difficulties of the key machine limit the available machine hours to 97,200 , review the recommendations made in (1) and (2) above and prepare an optimal production plan for the year to maximise profitability. Show all workings. You do not require to calculate the profit. (10 marks)