^{_{EXHIBIT 1 Budget for the quarter ending 31 March 2019 Euros Budget sales 200,000 Cost of production 149,500 Gross margin 50,500 Administration expenses 19,900 Distribution expenses 5,700 Sales commission 20,000 Financial expenses 800 46,400 Budgeted Net Profit 4,100 EXHIBIT 2 Schedule of Revenue and Production Costs per Product. Product A B C D Sales price 20 40 30 20 Direct material (imported) 7 16 13 10 Direct labour and packing 3 4 6 4 Production overhead 4 5 6 5 Budget sales (units) 1,500 2,000 2,000 1,500 NOTE: Production overhead includes both fixed and variable expense. The estimated fixed overhead for the forthcoming quarter amounts to 20,000 euros and has been apportioned to each product on the basis of total anticipated sales revenue for each product. Una continued "In my opinion there is no scope for any reduction in costs. We can't change, at least in the short term, our direct material costs. Neither can we change our packaging costs. Our direct labour consists of the part-time assembly workers which we need in order to produce. Likewise variable overheads will be incurred if we want to produce and our fixed overheads are already down to an absolute minimum. Commission is the only thing that we could effectively cut." Michael Carroll interjected. "No, I recommend that the sales commission be left alone. We're all in this venture together and I reckon we're going to have to sell our way out of our problems. We need to retain the incentive to sell and keep our selling prices intact." Everyone agreed. Patrick Carroll, the eldest member of the family, who was chiefly responsible for sales, raised the possibility of maximum sales levels of each product. He said, "We must take into consideration that there is a definite limit on the amount of goods which we can sell at existing prices next quarter." Michael Carroll accepted that the point was valid. After much discussion all family members agreed that maximum sales value of each product at current prices for the forthcoming quarter would be as follows: Product Euros A 60,000 B 88,000 C 63,000 D 40,000 Subsequently everyone at the meeting realised that due to the definite shortage of raw materials it was not possible to produce simultaneously all these quantities. Michael Carroll added "I think we shall have to be more selective in what we produce in future. However, I recommend that we produce a minimum of 1,000 units of each product during the forthcoming quarter. This would, at least, keep the company's products in the minds of the public and satisfy our major customers. Its important to do this. Any remaining materials should be used in the most profitable manner. Una, now is the ideal time to put some of that theory of yours into practice. If you feel that there is a single, best way to utilise our production facilities in these circumstances now is the ideal time to let us know." Requirements 1. Prepare a statement showing the most profitable production plan for Merrion Products Ltd. for the forthcoming quarter. Prepare a detailed profit and loss account to accompany your recommendation. You need to explain your workings in detail. 2. Calculate the firm's break-even point for the forthcoming quarter. You need to explain your workings in detail. What fundamental assumptions have you made? 3. What is the "opportunity cost", if any, associated with the minimum production of 1,000 units of each product? You need to explain your workings in detail. 4. Assuming it was possible to increase all selling prices by 7 euros per unit without influencing demand, would this price increase effect your analysis. This a}}