Cosmos Enterprises Plc are presently evaluating the

manufacture for sale of a new product a replica old Irish Rocking Chair for export. The company is known for its high quality craft work and is presently very labour intensive. In this instance it is looking at the possibility of automating the process for the manufacture of the rocking chair.

The product will have to be packaged for export, and protective wraparound packaging material and shipping will cost 30 per chair. The packaged chairs are individually crated before shipment. If the new machinery is purchased, the assembly of the crate and packing of the wrapped product will be automated, while otherwise the assembly of the crate and packing will take four hours of unskilled non-craft labour. The wood for each crate is bought in pre-cut lengths at a total cost of 17.50 per crate. Skilled craft workers are paid 18 per hour and unskilled non-craft labour are paid 7.50 per hour.

The general requirements per chair are:

Labour intensiveAutomated

ManufacturingManufacturing

ProcessProcess

Machine time (Turning)2 hours2 hours

Machine time (Other)-14 hours

High quality wood4 sq. metres2 sq. metres

Laminate & other wood sq. metre2 sq. metres

Skilled craft workershours 254

Because the labour intensive product will have a higher craft input, it is anticipated that this product will carry a price premium of 280 over and above the automated finished chair which will sell for 630.

Other costs include a variable production overhead which will be 10% of total craft labour costs. There is also a variable charge of 2.50 per machine hour in respect of all machine time other than turning. The charge for machine turning time is zero. High quality wood costs 26 per square metre, while laminate and other wood costs 9 per square metre.

Sales commission on all exports is paid at 10% of selling price.

The fixed costs of operating each process are estimated at:

Labour intensive Manufacturing269,100 per annum

Automated Manufacturing902,440 per annum

Required:

(a)Calculate the annual breakeven sales volume and the annual volume that must be achieved in order to earn a profit of 250,000 per annum, for each of the proposed manufacturing processes.

(15 marks)

(b)Calculate the volume of production/sales at which the level of profit earned would be the same irrespective of which manufacturing process is chosen. (Note that selling prices differ).

(3 marks)

(c)Briefly comment on the implications and usefulness of the information identified from your calculations for (b) above.

(3 marks)

(d)Assume now that:

(i) the annual volume of production/sales will be 3,000 units

(ii) Cosmos have adopted the labour intensive manufacturing process

and

(iii) that a special machine can be purchased to eliminate labour costs associated with the assembly and packing of the crates.

What is the maximum Cosmos would be prepared to pay for such a special machine? (Assume a one year productive life).

(3 marks)

(e)In respect of the Labour Intensive Processonly, assuming an annual sales level of 3,000 units is achieved, calculate:

(i) the annual profit

(ii) the Margin of Safety, in percentage (%) terms with respect to:

- Sales volume

- Fixed costs

- Variable cost